Are you thinking about refinancing your car loan? It can be a wise decision, but only if it’s the right time for you. Here are four signs that it might be the right move for you.
1. You have a good credit score: If your credit score is 700 or higher, you’re likely to get a lower interest rate than you would if your score was lower.
2. You’ve been making on-time payments: A history of on-time payments will help improve your credit score and make you a more desirable candidate for refinancing.
3. You’ve been driving your car for awhile: The longer you drive a car, the more equity you build up in it.
This equity can give when it has to do with refinancing your car loan, the process is a straightforward one and it Is very much simple. Refinancing your car loan simply means when you basically apply for a new car loan which has to pay off your outstanding car loan. And when this is done, the result leads to a new interest rate, a new loan agreement and a new loan term.
In general terms, people refinance their car loans to save money as the process could guarantee you a lower interest rate. This could open up cash for other financial obligations by decreasing your monthly payments.
Sometimes you may not get to find a loan rate that will favour you, but you can find another loan that has a longer repayment period, which might result in a lower monthly payment and this process might increase your interest cost during the loan period.
Figuring out when or if you should refinance your car can be tricky, but if you tackle it the right way or, perhaps, ask the right questions, you’ll be able to make the right choice. How then can you know when you should refinance your car? Let’s find out.
When Should You Refinance A Car Loan?
There are some situations when you need to refinance your car. But before then, look at your finances and be sure that you understand the details of the latest loan you’re about to sign up for. Here is when you should refinance your car loan.
When You Have A Positive Equity
To discover your loan-to-value ratio, contact your current lender and find out how much you owe. After that is done, divide it by your car’s value. You may get a better auto-to-refinance rate if your car is worth more than what you owe on it. You should find out first from the current lender the amount of loan you owe.
Increase In Credit Score
Your credit score is pivotal in car finance because auto lenders sort applications by credit tiers. Whether you’ll receive an offer or the APR you will get largely depends on the credit tier you belong to. If your credit score increased since you acquired the vehicle and you’ve gone one tier above, then it is likely that you will qualify for a better financing deal.
Indifference Between You And Your Current Lender
Why still keep your lender when you don’t have a cordial relationship with him or her or you don’t like the way they handle their job? All you have to do is change your lender and get yourself a new one.
Many people choose to refinance simply because they don’t like the way their current lender does business. Rude customer service reps or poor record-keeping can really sour a relationship with a lender. If you really can’t stand your current lender, refinancing with a new lender may help assuage some of your frustrations.
When you are changing your lender to a new one, do not automatically agree to refinance add-ons without asking the prices of the products or doing research.
Loan Rates Are Down
If U.S. consumer loan rates have dropped since you took out the auto loan, you may qualify for a better APR. For example, in March 2020, the Federal Reserve cut consumer loan rates to 0%-0.25%. Auto loan rates correspondingly went down as well. A small change in rates can save you money on interest. Everyone loves it when they can get a loan at a low rate, well, who doesn’t? Always make use of such opportunities if and when one arises. It’s usually a perfect time to refinance your car loan when the rates are down.
Change Of Loan Term
It also makes sense to refinance your car loan when you need a lower monthly payment. You could extend the length of the loan on your car refinance to get a lower payment. Still, it’s important to note that extending the length of your loan, which is known as the loan term, reduces your payment, but also increases the amount of interest you’ll pay over time. And it works the other way, too: Reduce the term, and your monthly payment will increase while the amount of interest you pay overall will fall. Note that a longer-term possibly means a higher interest rate.
Pros And Cons Of Refinancing
If you’re running low on money or see a better interest rate advertised, refinancing a car loan can be mouth-watering. While you will sometimes get a better deal from a different company, it is essential to take a close look to make sure you will benefit from refinancing. Refinancing has pros and cons, and the best choice will depend on your situation.
Lower Interest Rate Or Monthly Payments
Refinancing to a loan with more favourable terms can be a great way to lower your interest rate or monthly payment amount. You don’t want to make any assumptions about savings, so use an auto refinance calculator to see if you’ll save money overall.
A Source Of Extra Cash
In some cases, you could borrow extra cash. If your car is worth more than you owe on your current loan you might be eligible for a cash-out refinance loan. This helps you refinance your car loan and borrow extra money based on your equity in the car. That’s cash you can use to pay down higher-interest debt in your emergency fund.
Disparate Loan Tenures
Another major plus is the opportunity to change your loan term, that is, the period of time that you’ll be paying off the loan. Ideally, you should try to keep the term short so that you will be paying the least interest over the life of the loan. However, you’ll also want to consider your monthly budget. If extending your loan term and reducing your monthly payment helps you stay on top of your bills, adding more time may be worth CONS.
An Ephemeral Dip In Credit Score
Refinancing a car loan typically has the potential to lower your credit score momentarily. This is partly due to the fact that it mostly requires an obdurate pull credit check and also to the fact that you are replacing an older loan with a current one.
Difficulties In Finding A Lender
Sometimes, finding a lender could prove difficult. Will you be able to attract a lender with the type of car you drive or the longevity of the car? Well, these are some reasons why you might not attract a lender.
- You owe more than $100,000 on your current loan
- Your car is your primary source of income or you usually use it for commercial purposes.
- Your vehicle is more than 10 years old.
- Your car has more than 100,000 miles on it.
- You owe less than $7,500 on your current loan.
Prepayment Penalties Repayment Penalties And Fees
Read the fine print of your existing loan contract. Does your current loan charge penalties for paying off your loan early? Many lenders don’t, but if yours does, you’ll likely want to calculate whether those fees will cost you more than you’d save with a new loan. Plus, there could be fees charged by your new loan company, too. If it costs too much to switch your car loan to a new lender, those costs to refinancing your car loan may cancel out the benefits, and you might be better off staying with your original loan.
Is Refinancing Worth It?
If refinancing your vehicle is necessary to improve your cash flow, you may refinance immediately to get back into a positive financial situation.
If you’re simply refinancing, and you are sure of getting a nice rate and perhaps save yourself some money, then yes, it is worth it. But if you’re not sure of saving any money, use the auto refinance calculator to calculate your savings and decide if it makes good financial value to your finances. If you’re not sure of any of these, then you should speak to a Counselor.
Will Refinancing Impact My Credit Score?
In truth, any new loan you are committing yourself to, it will definitely change your financial image. Refinancing needs an obdurate and stern inquiry. This means that your credit score may dip as much as five points for a while when you apply with your lender.
When Can I Refinance?
When to refinance mostly and solely depends on your situation or perhaps what you aim to achieve.
You can refinance when you lose your job or perhaps your partner earns less and you need a monthly budget cut.
You can also refinance when they align with what you aim to achieve. Let’s say you want to clear a debt, applying for the monthly savings from refinancing can help you get to that point.
Refinancing is usually a good idea when you can qualify for a better interest rate. Whenever your credit score increases, you might be eligible for a better interest rate. This can also help you save your money.
Have you considered refinancing your car loan? If so, there are a few things to consider before making the decision. First of all, have you been paying on time and keeping up with your monthly payment obligations?
Secondly, how much is your current interest rate compared to other rates in that same category or lower range? Finally, what do you think would happen if you were able to reduce your monthly payments by $200-$300 per month? Would this make it more feasible for you to keep driving the vehicle without feeling stressed about money every day when it comes time for a new payment each month?
The decision to refinance a car loan can be difficult. In this blog post, we’ve discussed the importance of understanding your financial situation and how it may affect you when refinancing.
We hope that by following these guidelines for when to refinance a car loan, you will feel confident in making a well-informed decision about whether or not this is the right option for you!
Let me know what you think in the comment section below.