Financial Tips Friday - Refinancing Auto Loans
Refinancing Auto Loans
A quick and painless way to shave dollars off your monthly bill and hundreds of dollars off your total interest paid.
Ever thought about refinancing your car loan to capture a lower interest rate? It can be done. Unlike refinancing a home mortgage, the process is quick, and easy, with relatively low out-of-pocket costs. Typically, it is just the transfer of title.
Higher Score, Lower Monthly Payments
So, if it’s that simple, why aren’t more people doing it?
One reason is that the difference in your monthly payments once you refinance isn’t nearly as significant as with a home mortgage, since the amount borrowed is less, and car loans are shorter-term loans. But, in certain circumstances, an auto refinance might be worth looking into, particularly if you’ve seen:
A significant improvement in your credit score since you took out your original loan
If you didn’t shop around for the best rate on financing the first time
Still unsure if it’s right for you? Let’s look at an example.
If you took out a five-year, $20,000 loan two years ago at an interest rate of 12%, your monthly payment would have been $445. If you refinance the remaining amount – about $13,400 – into a three-year loan now, at 10% interest, that would drop your payment by about $13 a month. That means you’d save a little more than $400 over the life of the loan, and while that’s certainly enough for the refinancing to pay for itself, that amount might not be enough to get you excited.
Let’s say you could decrease your interest rate to 5.34%. That would put you saving closer to $40, or $1,440 over the remainder of the loan — some serious cash.
Steps for Refinancing
1. Understand the Back Story
There are a couple of reasons why your rate might be higher than it should be.
The first is your credit score.
The second could be an inflated rate if you financed through a dealer.
These days internet-savvy consumers know how much they should be paying for cars down to every last option. That’s trimmed profit on cars to dealers who make it up in profit on both financing and servicing your vehicle. That’s why it’s just as important to shop around for financing for your car as for the car itself. You’ll want to walk into the dealership having already secured financing from at least one credit union or bank
2. Mind Your Score
In the months leading up to your loan application, keep in mind that your credit score will directly affect your interest rate. So, be extra careful about paying your bills on time and keeping credit card usage at a minimum (preferably at 30% of your available balance or less.) Also, don’t apply for other cards or loans if you know a biggie — like an auto loan or mortgage — is in your near future. And don’t close old credit cards you’re not using right now. All of these moves will help make sure your score doesn’t drop before you apply.
3. Find Your Lender
Once you’re ready to refinance, start rate shopping at the many banks and credit unions. Also, if you took dealer financing and think you could get a better rate, you can refinance immediately after you take out the original loan. Not all lenders who offer auto loans will also offer refinancing, so check again out the offerings at your bank or a local credit union.
4. Don’t Stretch Your Payment Term
Extending the life of your loan may indeed lower your monthly payments, but it will cost you more in interest over time — even if you’re able to lower your interest rate. You may be tempted to extend, but your new loan should never be longer than what was remaining on the original.
When to Refinance
Interest Rates are Lower. If loan interest rates have dropped since you took out your auto loan, then it could be a good time to refinance. Even a one percent drop in interest can save you plenty of cash.
Your Score is Better. Another good time to refinance your auto loan is if your credit score has improved. The higher score will likely mean you qualify for a loan with better terms.
You Want a Lower Payment. If your budget is stretched thin and you need a lower payment, you might want to try and refinance. Just remember that reducing your monthly payment means extending the term of the loan, so you’ll be paying more interest over time.
When Not to Refinance
Your Car is Older. The older the vehicle, the harder it will be to find someone to offer you a loan. Most lenders set limits on how old a vehicle can be to qualify.
You’re Close to Paying Off the Loan. You don’t want to refinance if you’re close to paying off the loan. Often doing so won’t save you much money at all. It’s better to just pay off the loan and be done with it.
You’re Underwater. If you owe more on the loan than the car is worth (also known as being “underwater”), then you will have a hard time finding a lender to offer you good terms.
Originally written by SavvyMoney
