Is Now the Time to Refinance Your Car Loan?
Have you obtained a car loan at some point in the past? Are you having difficulty making the repayments?
Or do you simply feel that the interest rate is too high? With the new year upon us and interest rates on the decline, it may be time to refinance your existing car loan – and it could save you a significant amount of money in the long run.
If you’re trying to decide whether refinancing your car loan is the right move, here’s all you need to know to help you make the right decision.
WHAT DOES IT MEAN TO REFINANCE A CAR LOAN?
When you refinance, you substitute your current loan with a new one that includes different terms. Auto refinancing is the process of paying off your current loan with a new one. This process can have varying outcomes for new car loans. Before refinancing a car loan, it’s important to understand your reasons for doing so and the outcomes you are seeking.
WHEN SHOULD YOU REFINANCE A CAR LOAN?
Here are a few typical situations when it makes sense to refinance a car loan:
Your credit score has improved. If you’ve been making on-time payments toward your current auto loan for the past 6 months, your credit score has likely improved. Because of this, you could get a lower rate through refinancing.
Your income has increased. If your income has increased, it might be worth it to refinance your car loan for a lower rate and shorter loan term. If you can afford the higher monthly payment that comes with a shorter term, you could save thousands on interest in the long run.
Your debt has decreased. If you had debt when you first got your car loan that you’ve since paid off, you’ll have proof that you’re good with your finances. This shows lenders that you can afford your repayments, especially if you plan on shortening your loan term.
Your interest rate is too high. It could be worth it to find a new lender with a lower interest rate. Even if you don’t get the lowest rate out there after refinancing, you could walk away paying less in interest than you previously were.
You want to save money. Extending your term can help lower your monthly payments. You may be able to find a lender who can also lower your interest rate at the same time.
You want a different lender. You might want to refinance a car loan if you’re dissatisfied with your current lender. In this case, do plenty of research before deciding on a new provider to make sure they’ll be a better fit.
You want to remove a co-signer. You could decide to refinance if you want to remove someone from your loan agreement. Maybe your parents helped you co-sign the loan, but now your credit is good enough to manage on your own.
BENEFITS OF REFINANCING A CAR LOAN
Lower Monthly Payments
Most of the time, people seek car loan refinancing to lower their monthly payments because doing so can immediately impact a household’s monthly expenses. You can lower your monthly car loan payments by:
•Getting a lower interest rate
•Extending the number of months over which you pay for your car
•Or doing both
Just keep in mind that when you extend your loan term, it’s possible that you will end up paying more for your car in total than you would without extending it. But if your lender allows you to extend your loan term AND gives you a lower interest rate, you may both lower your monthly payments and pay less in total for your car.
Decreased Interest Rate or Interest Rate Charges
While intertwined with the goal of lowering monthly payments, some people refinance primarily to lower the
interest rates on their loans.
If you have recently improved your creditworthiness, then you can usually get a new car loan with a lower interest rate. When you lower your interest rate, you may reduce the total interest charges you pay on your car loan – but this is assuming your car loan term is not extended or not extended by too many months.
Potential for Cash Back
Refinancing a car loan for a larger amount than what you owe could allow you to tap into your car’s equity. This could let you borrow enough to pay off your old loan contract and get a bit of extra cash on the side. To get cash back when you refinance, you must have equity in your vehicle.
Add or Remove Loan Co-Signers
There are a host of personal reasons why someone might want to add or remove someone to their car loan. Refinancing is a straightforward way to do so because the process gives you a new loan with a brand new contract that includes the option to make those changes.
OTHER THINGS TO KEEP IN MIND WHEN REFINANCING
•Your credit status. Refinancing is sometimes not a good option if you have bad credit as you most likely won’t be able to take advantage of lower interest rates
•Prepayment penalties. You could end up losing money if you get lower interest rates but have to pay penalties for closing your old loan contract early.
•Extra interest. You may have to pay more in interest if you extend your term length (even if your monthly payments are smaller).
READY TO REFINANCE?
Here at Birchwood Credit, we know every refinancing situation is unique and every customer has their own individual reasons for doing so. With our in-house financing option, we take the time to learn about your needs and provide you with a car loan that matches your budget. Contact our team today to learn more!
