If you aren’t pleased with your current auto loan, you might wonder when it’s the right time to refinance. The process is simpler than you might think. And depending on your situation, you could save hundreds or even thousands of dollars over the life of your loan. Here are the times when refinancing makes the most sense:
Your Credit Has Improved
Borrowers with dings on their credit report often have to pay higher interest rates when financing a car purchase. But just because you start with a high-interest loan, doesn’t mean you have to stick with it. If you’ve been diligent about making payments on time – even for as little as a year – you might qualify for a lower interest rate. It’s certainly worth looking into.
You Need to Lower Your Monthly Payments
If you need to decrease monthly expense, refinancing your auto loan to stretch out the repayment term is one option to consider. The tradeoff is that you’ll be paying more in interest over the life of the loan. However, when your finances become stable again, you can always increase your payments. That should allow you to pay off the loan sooner and save money on interest.
You Took High-Interest Dealer Financing
Dealers love to take advantage of novice car buyers who are more focused on the monthly payment than the price of the car. But you aren’t necessarily stuck – even if you just drove off the lot. Shop rates and see if another lender can get you out of that loan and into something more affordable. If it’s early enough, you may still qualify for the new car rate.
You Can Save Money and Pay off Sooner
If you can qualify for a better interest rate without extending your current term, you will save money by refinancing. Want to save even more? Refinance to the lower rate and keep paying the same amount each month. The extra dollars will go straight to your principal balance and your loan will be paid off sooner.
When to Avoid Refinancing Your Auto Loan
There are a handful of situations when refinancing doesn’t make sense:
- When you will owe much more than the car is worth – typically if the car is several years old. Being “upside-down” makes it more challenging if you ever want to sell the car because you;re still on the hook for the current loan. You won’t get enough money from the sale of the car to pay off the loan. This means you have to write your lender a check or roll the leftover amount into your new car financing, which will increase your monthly payments. In this case, refinancing is too costly.
- If your current loan has prepayment penalties, it may not be worth it to refinance because what you pay in fees will outweigh what you save in interest.
How to Refinance Your Auto Loan
Refinancing an auto loan is very simple. The Credit Union makes the process seamless so you can start saving money quickly with very minimal hassle. It requires a simple application, a few electronic signatures, and a few days to get a new loan.
If approved, you’ll be presented interest rates and term options. Pick the one that’s right for your current situation, whether you’re looking to maximize your savings or lower your monthly payments, or both, and you’ll be on the road with a new loan in a matter of days.