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Maybe you were a first-time buyer with poor credit. Maybe you focused only on the monthly payment instead of the overall price of your vehicle. Whatever your situation, if you think you’re paying too much, you may want to refinance your auto loan.
That’s especially because current auto loan rates are attractive, making refinancing very worthwhile.
Indeed, a lower interest rate could help you pay back your loan more quickly and reduce the size of your monthly payments.
When you refinance your auto loan, a new loan is used to pay off your existing loan. And like other secured loans, lenders want some collateral to back up the loan. In this case, it’s your car.
If your current circumstance or motivation fits into the scenarios below, a refinance may be for you.
Here’s when to refinance your auto loan:
1. You financed through the dealer
John Reiter, an underwriter for South Carolina State Credit Union, says dealers are notorious for marking up rates when they arrange financing for their customers.
“Even a 2% markup could cost you hundreds, even thousands, of dollars depending on the loan term and how much money you borrowed,” says Reiter.
So, if you financed your vehicle through a dealer, and the interest rate is higher than what’s being offered by a bank or credit union, you’ll likely benefit from a refinance.
2. Your credit score has improved
If you had poor credit when you financed your car, and your credit score has improved since then, refinancing might be for you. Because of improved credit, you’ll qualify for a lower interest rate, which will likely transfer to lower monthly payments.
Make sure to check your credit report and score before applying to refinance your auto loan so you know beforehand if you can get a lower rate.
And keep in mind that making on-time payments can work miracles to help build and improve your credit.
3. You want to save on interest payments
If your overall financial situation has improved —you have less debt and more income, for instance — you may want to consider refinancing into an auto loan with a shorter term.
While your monthly payments will almost definitely go up with a shorter loan term, you’ll save money by paying less in interest over the life of the loan.
4. You need to lower monthly payments
If you’re having a hard time making ends meet financially, you may want to refinance your auto loan into a longer term. It can give you some relief by lowering your monthly payments.
Consider, however, that extending your car loan will cost you more over the life of the loan.
5. You originally had a co-signer
If you had a parent or spouse co-sign your existing loan, and you want to remove them, a refinance can help.
A co-signer is very common for first-time buyers, those with little to no credit history and couples.
But to refinance your auto loan, your credit must meet the lender’s minimum credit requirements without the help of your co-signer. So, if your credit isn’t up to snuff, be prepared to pay a higher interest rate to remove the co-signer.
Shop Around for the Best Rates
Depending on your situation, refinancing an auto loan may save you money on the total loan repayment, reduce monthly payments and help you put more cash in your pocket.
But Reiter is quick to point out that the refinancing rate you qualify for depends on several factors, including your term length, credit score and the age of your car.
In order for it to be worth your while, an auto loan refinance must have a financial benefit. So remember to shop around for the best auto loan rates.
Banks, credit unions and online lenders offer a variety of rates with flexible terms to fit your needs.