3 Reasons Why You Should Refinance Your Car Loan
Bills are a lot like crummy weather. They’re going to come anyway, so you might as well not try to fix them, right?
For some bills, that’s the case. For others, though, you can make a big difference in your monthly budget with a little legwork.
One bill you may be able to change is your car payment. Refinancing your car loan can lead to a lower monthly payment, a shorter term, or both! It depends on a wide range of factors, including the value of your vehicle, how much you owe on your current loan, and your credit standing.
If any of these factors have changed since you bought your car, you owe it to yourself to check out your refinancing options. Let’s look at some common life changes and when they might be caused to look at refinancing. Read on to learn about three scenarios where refinancing makes sense for your car or truck.
1. Your credit improves
One of the biggest factors in determining your car loan status is your credit score. When your lender is building a loan package, a credit report is pulled as a central part of that process. That number helps define your interest rate, whether or not you’ll have to pay a premium for insurance, and what other fees your lender might charge.
It’s worth keeping a copy of the credit report your lender pulled. That can let you see if your credit score has improved. It can take as little as nine months of steady repayment to boost your credit score, and that could result in a cheaper loan if you refinance.
If you didn’t have much experience with credit when you purchased your vehicle, refinancing can do you a world of good. Interest rates as high as 18% are common for borrowers who have little to no credit history. Having even a few months of solid payments on your side can cut that rate in half or more.
"If you’ve never shopped around for a car loan, it’s definitely worth doing."
2. You didn’t shop around before you borrowed
Many people feel railroaded throughout the car-buying process. They pick a car they like, then they are told what the price is, what the monthly payment is and everything else. It may seem like the choice of lenders for your car loan is predetermined.
Dealers tend to have a smaller range of lenders with whom they work exclusively. Those lenders know they have limited exposure to competition, so they can charge slightly higher fees and interest rates. By doing your own comparison shopping, you can save quite a bit on both the loan and any ancillary insurances or warranties you may have purchased. Dealer rates tend to be 1 to 1.5% higher than those offered at smaller lenders, like credit unions.
If you’ve never shopped around for a car loan, it’s definitely worth doing. By getting multiple offers, you can ensure you’re getting the best price available for your loan. Try to do your shopping inside a 15-day period. Otherwise, the multiple checks on your credit could negatively impact your credit score.
3. You need to change your monthly payment
You may be in a much better financial situation now than when you bought your car. You may have a better job or more security. You may have paid off a credit card or other debt. All of these things free up how much you can pay per month.
Most people don’t go into the refinancing process looking to increase their monthly payment, but you can save yourself money in the long term by committing to a faster repayment plan. If you can afford to pay more per month now, you can pay off the balance on your car faster. Shorter-term loans usually also have lower interest rates, since the lender assumes less risk in making the loan. Once the car is paid off, you’ll have all that money to devote to other saving or spending priorities.
On the other hand, if money is tight, it might be a good idea to refinance into a longer-term. While you might end up paying more in interest, you can reduce your monthly payment and save the money you need right now.
"If you can afford to pay more per month now, you can pay off the balance on your car faster."