Replacing an existing loan with a newer one, usually through a different lender, is known as refinancing. Most people use it to lower their monthly payments or extend their loan terms.
It’s generally a good idea to refinance if you can save money on interest. It’s only sometimes a wise financial move, especially with interest rates rising. So think twice before applying.
Four Things To Keep In Mind When Refinancing A Car Loan
Refinancing can help you save on interest while lowering your monthly payments. To find the best deal, carefully compare lenders. This could result in larger long-term savings.
1. Look Around You
Before applying to a lender, do your homework and compare the terms and interest rates various lenders offer. Look into credit unions, large banks, and online lenders for the best auto loan deals. Because each lender has their rate calculation formula, it is critical to obtain multiple quotes.
Preapproval is usually possible before submitting a full application. You will be given a rate quote and a rate quote without having your credit score affected. You can choose the best rate and begin the refinancing process after being preapproved by several lenders.
If there is no option for preapproval, keep your applications brief. Multiple inquiries will be combined when calculating your credit score if they are all made within a short period.
2. Consider The Fees
Before refinancing, consider whether any fees will reduce your savings. On auto loans, there may be a prepayment penalty. This means that paying off your loan early may cost you more than you save by lowering your interest rate.
Some lenders may charge a significant origination fee on refinance loans. It could be a prepayment penalty, or it could deplete your savings. It may be easier to refinance if you stick with your current lender.
Transaction fees may be assessed by both your old and new lenders. These fees cover the administrative and processing costs of terminating an existing loan and initiating a new one. These fees could be negotiated. In some states, re-registering your vehicle after refinancing can be costly.
3. Understand How Credit Affects Your Credit
Almost every time you apply for credit, a hard inquiry will lower your credit score by a few points. If you open a loan account, your credit score may suffer.
Your payment history is more important than your credit score. On the other hand, making on-time loan payments will boost your credit score. Refinancing will only make much difference if you haven’t applied for credit in a while or don’t have a credit history.
4. Consider Where You Already Have An Account
Begin your refinancing search by contacting financial institutions with which you already have a relationship. This method has numerous advantages.
Because you already have a relationship with a bank, lender, or credit union, you may be eligible for a loyalty discount on certain loan fees if your financial institution is aware that you make regular payments and maintain positive balances, your chances of refinancing increase.
Alternatively, a lender you know may be willing to refinance your loan if you have a low credit score.
When Should You Refinance Your Auto Loan?
Refinancing a car loan at the best possible time. It’s a good idea if it saves money. Refinancing is most advantageous in a few circumstances.
- The prime rate has dropped, and car loan interest rates have risen and fallen. Although interest rates are rising, depending on when you buy your car, you may still be able to find a lower rate.
- Your credit rating has risen. Increasing your credit score may be sufficient to qualify you for a lower interest rate. Applying for a loan with better terms may reduce your out-of-pocket expenses.
- The dealer provided your initial loan. Dealers charge higher interest rates than banks or credit unions to maximize profits. You could refinance with another lender if you obtained your initial loan through dealer-arranged financing.
- Monthly payments must be reduced. You can refinance your loan to longer repayment period if your budget is tight. However, you will pay more interest because you are extending the loan term.
In Conclusion
Refinancing is an option if you can qualify for a lower interest rate and save money over the long term. Consider how long you have to repay the loan before refinancing. Your savings could be negligible or worthless, depending on where you are in your repayment schedule. Use the car loan calculator to see how much you can save by refinancing.
Refinancing may be prohibitively expensive. There are, however, alternatives. If your car payments are too high or your financial situation is dire, you should consider requesting a loan modification from your lender.
