Just because you’ve agreed to the terms of a car loan does not mean you’re locked in forever. In fact, if your loan allows, you can technically refinance your loan very soon after you’ve purchased a vehicle.
But should you refinance your car? What is the best time to do so? And why exactly might you want to refinance? We’ve compiled some helpful tips and guidelines to help you figure out the best time and reasons to refinance your car.
What is Car Refinancing?
Refinancing occurs when you use a new loan to pay off your existing loan. The result is that you have assumed a new loan with different conditions. The new loan usually is superior in some way, like lower interest rates, lower monthly payments, or shorter loan terms.
Refinancing can save you hundreds to thousands of dollars. If interest rates on the market have dropped or your credit score has increased, you may be eligible for loans with much better APR and terms than you currently have.
Refinancing can shave months off your car loan. The less time you are paying off your car loan, the less interest you accrue, and the more money you save!
If you have recently purchased a new car, but now you find that your car loan is taking too much out of your bank account each month, you can also refinance to achieve lower monthly payments. This will mean you will likely end up paying more in interest over the life of the loan. But, if you need the extra cash each month, it might be a good solution.
Refinancing is pretty straightforward. The process goes like this:
- Check the conditions of your current loan – be wary of prepayment penalties!
- Check what you still owe
- Shop for refinancing loans – compare the potential APR you can obtain
- Gather your information
- Once approved, your new financial institution will pay off your previous loan and help you transfer the title.
It’s important to be aware of potential prepayment penalties your current loan may have. Some loans will cost you a fee for paying them off before the original term you agreed to ends, which might negate the benefits of refinancing.
Choosing a Good Time to Refinance
Deciding when to refinance can seem tricky. Here are some pretty simple guidelines to help you decide.
Rates have gone down
Rates for car loans fluctuate over time. If you’re shopping for a new car loan to refinance with, it’s not a good idea to shop when interest rates are high. If you’ve been looking and rates have gone down, it might be the right time to refinance.
Financial analysts often track what they project will happen to loan interest rates. If you search the internet for these projections, you should be able to keep an eye on what is happening with interest rates.
If rates have gone down, you have a few options. One is to get a loan with the same monthly payment as before, but a lower interest rate and shorter term. This means that you pay the same each month, but you’ll pay off your loan faster and save money on interest.
Instead, if you opt for a lower monthly payment and lower interest rate, you will save money on interest, but you might end up paying the loan off over a longer period, costing you some additional money.
Your credit score has improved
If you had a great credit score when you got your car loan, but now you’ve missed some payments and taken a few hits to your credit, now might not be a good time to refinance.
On the other hand, if your credit score has hit a positive streak, you might be able to access much better loan terms.
You need to lower your monthly payments
As discussed above, sometimes you make a mistake when budgeting. If your car payment has you struggling to make ends meet, you might want to refinance for lower monthly payments. This usually means extending your loan term.
You’re not near the end of your car loan
Interest that you pay decreases as you make car payments. Thus, if you’re near the end of your loan, refinancing might not save you money.
Starting the Refinancing Process
If you’ve decided you want to go ahead and refinance your car, give us a call. Our branch lenders are here to discuss your goals and budget to help you save money on your auto loan.
Ready to get started?