When Does it Make Sense to Refinance My Auto Loan?

For many Americans, monthly car payments are a fact of life. Few of us can afford to pay cash for a car, and we accept that there is a financial responsibility associated with car ownership.

That said, car payments can be burdensome. Financial situations can change, and you might wonder if there’s a way for you to save money on your car payments. In fact, one of the most common questions we hear from Addition Financial members is this:

When does it make sense to refinance my auto loan?

That’s an important question to ask. You don’t want to refinance an auto loan unless it’s worthwhile to do so. Let’s talk about when it makes sense.

If Interest Rates Have Dropped Since You Bought Your Car

Interest rates on car loans reflect the economy’s performance. If you bought your car at a time when the economy was not great, then you might be able to get a better deal if you refinance when interest rates are down and the economy is strong.

You can get an idea of where interest rates are by doing some online research. If rates are generally lower than the rate on your existing loan, it might be a good time to refinance. Having a lower rate can save you a significant amount over the term of your loan.

Your Credit Score Has Improved

It may make sense to refinance your car loan if your credit score has improved since you bought your car. Let’s look at a general breakdown of credit scores to get an idea of how they can affect the interest rate you can qualify for.

• If your FICO score is below 600, you can expect to pay an interest rate that may be two or three times higher than someone with a better credit score.
• If your credit score is between 601 and 660, you can qualify for a good interest rate.
• If your credit score is 661 or higher, you may be able to qualify for a prime interest rate.

In other words, if you had a score that was below 600 when you got your current car loan and it’s now more than 700, the chances are very good that you’ll be able to qualify for a better interest rate.

You Got a Dealer Loan

When you buy a new or used car, it can be quite convenient to apply for a loan with the dealership. You won’t need to make an extra stop and in many cases, the loan approval may be quick. Those things can make a dealer loan seem like the best option when you’re in a hurry to get behind the wheel.

However, there’s a downside to dealer financing, too. In many cases, dealers build hidden fees into their loans and they rarely represent the best rates available. There’s a good chance that even if your credit hasn’t changed substantially since you got your loan, you can still qualify for a better rate if you go to a bank or credit union and refinance your car.

You’re Worried About Monthly Expenses

As we said in the introduction of this post, making a monthly car payment is a fact of life for many of us. However, that doesn’t mean that the payment is affordable or that you couldn’t benefit from finding a way to lower it slightly.

If you can refinance your car loan at a lower interest rate, the chances are you’ll be able to lower your monthly payment at the same time. That can free up cash for other expenses and give you more money on hand each month for incidentals. The one thing to be wary of if you’re focused on your monthly payment is the term of the loan. If you accept a longer loan term than what you have currently, you might end up paying more at the end of the loan than you would have if you had not refinanced.

When NOT to Refinance

Keep in mind, refinancing could be a mistake under some circumstances. For example:

• You have already paid off most of your existing loan. In that case, refinancing could mean paying more interest than you would if you just finished paying off your original loan.
• Your car is old or has a lot of miles on it. Many lenders won’t refinance loans on cars with more than 100,000 miles on them.
• You’re planning on buying a home or applying for more credit soon. Refinancing may not make sense if you’ll be applying for a mortgage or taking on credit for some other reason because multiple credit inquiries for different types of loans tend to lower your score.

It doesn’t always make sense to refinance an auto loan. However, if one of the scenarios we’ve outlined here is applicable, then you should consider refinancing as a way to save money.

Want to learn about Addition Financial’s auto loan refinancing options? Click here now!