3 Best Reasons For Refinancing Your Car Loan
If you’ve been wondering if you should refinance your car, you’ve come to the right place. It should come as no surprise that debt is one of the most commonly reported causes of stress amongst Americans.
Whether it be credit card debt, mortgage payments, student loans, medical debt, or their car loan, some people feel as if they’re literally drowning in debt.
Luckily, there are several solutions and strategies one can employ to regain control over their finances and achieve economic stability.
One of these strategies involves refinancing an auto loan. Here we’ll look at exactly how auto loan refinancing works as well as the benefits of refinancing a car loan.
What Does It Mean To Refinance Your Car
So, how does refinancing a car work? The general premise of refinancing involves replacing one’s existing loan with another loan that offers terms more favorable to the borrower.
For example, let’s say a person has an auto loan that carries an interest rate of 15%. When they initially took out the loan, their credit score wasn’t very high, resulting in the 15% interest rate. After a year or so, they may have taken steps to greatly improve their credit score, perhaps by paying off their student loans or credit cards.
This increase in credit score allows them to qualify for a reduced interest rate.
Anyone in this position would then seek to refinance their remaining balance at a lower interest rate. Their current loan would essentially be replaced with another loan at a lower interest.
The benefits to auto loan refinancing are fairly obvious as the lower interest rate results in lower monthly payments and a significantly reduced overall cost of the loan.
These lower monthly payments can be especially helpful for individuals who are struggling to make their monthly payments. In some cases, the overall term of the loan can be increased, resulting in a further reduction of monthly payments.
When To Refinance Your Car Loan
Auto loans are a major source of debt for many Americans and the advantages of refinancing a car loan shouldn’t be understated. Unfortunately, not everyone understands exactly when they should consider this.
Monthly Payments You Can Afford
According to recent data from Edmunds, one of the leading online resources for automotive information, the average monthly car payment has risen to just under $600 per month. Some people, especially those with a high debt-to-income ratio, will undoubtedly have trouble making such large payments, especially if they have other debts they need to service.
One of the main advantages of refinancing a car loan is a lowered monthly payment. If the borrower can successfully refinance their loan at a lower interest rate, they can greatly reduce their monthly car payments. As previously mentioned, in many instances the borrower may be able to increase their loan term, resulting in a further reduction of their monthly car loan payments.
If You Can Get A Better Rate
Just like mortgages, credit cards, and personal loans, auto loan interest rates are set primarily on current market conditions. When the economy is booming, interest rates tend to increase. When it begins to contract, interest rates begin to fall and sometimes to extremely low rates.
If an individual finds themselves in a position where market conditions have caused interest rates to drop below what their current auto loan carries, they should seriously consider refinancing their loan.
It’s important to keep in mind that all loans have origination fees, usually totaling 2-5% of the total loan value. When refinancing an auto loan, it’s important to ensure that the savings gained from the lowered interest rate offset the origination fees.
If You Can Get A Better Loan Agreement
As previously stated, many people take out auto loans when they have a less than desirable credit score. A couple of years after, their financial situation may improve and allow them to get out of debt and improve their credit score.
An increase of even 80-100 points can result in a significantly lower interest rate, especially if the individual's credit score was previously in the 600 range.
Anyone whose credit score has improved since they initially took out their auto loan stands to save large sums of money by refinancing their loan. This is by far one of the main advantages of refinancing a car loan.
Overall, many people continue to pay large amounts of money in interest simply because they’re not aware that refinancing is an option.
For those who qualify, auto loan refinancing is an excellent way to lower one’s current interest rate and the total cost of the loan.