Is there ever a right or wrong time to refinance a car loan? Whether you opt for a new or used vehicle, buying a car can be an expensive endeavor. It’s no surprise, then, that the vast majority of cars on the road today are financed with the help…
Do you have a car with an existing car loan on it? If you do, you may want to look into refinancing your vehicle in 2019.
Refinancing a car means you take out a new loan and use it to pay off your existing auto loan. Then, you pay back your new lender. Ideally, the interest rate on the new auto loan will be much lower than the rate on your current loan so you can cut the costs of loan repayment. You may also be able to change other loan terms too, such as the repayment timetable.
Of course, refinancing isn’t the right choice in every situation. To decide whether refinancing in 2019 makes sense for you, just answer these five questions.
- Can you qualify for a lower rate loan?
- How much money will you save?
- Are you underwater on your current loan?
- Will you change your loan repayment timeline?
- Does your current loan have prepayment penalties?
Can You Qualify for a Lower Rate Loan?
While auto loan rates are generally affordable in 2019, rates vary by lender and depend upon factors such as your credit score, income, and the amount you need to borrow.
You’ll need to shop around among different lenders and compare rates to see if you can qualify to refinance at a lower Annual Percentage Rate (APR) than you’re currently paying.
If you can’t qualify for a lower rate, it makes little sense to refinance and pay more. The only exception might be if you can get a loan at a similar rate you’re paying now and you need to change something else about your loan – such as lowering monthly payments that have become unaffordable or changing loan servicers due to poor customer service.
How Much Money Will You Save?
Refinancing a loan can take time. You’ll need to compare lenders and go through an application process that involves submitting financial documents. You may not want to go through the trouble if you can’t reduce your monthly payments or the total cost of loan payback.
The good news is, many people with higher interest auto loans will be able to save a substantial sum by refinancing at a lower rate in 2019.
Say you have a $25,000 car loan at 6% for 60 months and can qualify for a loan at 4.5% for 60 months in 2019. If you don’t refinance, you’d have payments of $483 monthly and your loan would cost you a total of $28,999. But, if you refinanced your $25,000 loan, you could bring your monthly payments down to $466 and your total interest costs to $27,965. You’d save $1,034 in interest over the life of the loan and your payments would be $17 a month – or $204 a year – less.
Saving more than $200 a year and over $1,000 in total is definitely worth filling out a little paperwork, especially since it’s possible to apply for an auto refinance loan online without ever leaving your couch.
Are you Underwater On Your Current Car Loan?
There’s one hiccup that you may face that affects your ability to refinance: you may owe more than your car is worth. This is common when you buy a newer car with a low down payment because cars lose a lot of their value in their first year.
If you owe more than your vehicle is worth, you’re said to be underwater on your loan. Many lenders won’t allow you to borrow more than the current market value of your car, so refinancing would be a challenge because your new loan wouldn’t be enough to pay off your existing loan balance. You might have to come up with the cash to pay off the remaining amount due if you decided to try to move forward with refinancing.
How to Calculate a Truck's LTV
What you owe
What it's worth
LTV = 112%
There are some auto loan lenders out there that do allow you to borrow more than what your car is currently valued at – up to 120% of the car’s worth, in some cases. But, you won’t have as many different loan options under these circumstances. And, you could make your situation worse if you end up extending the amount of time to pay back your loan, as you could end up even more underwater by paying less off each month towards your car.
Will You Change Your Current Loan Repayment Timeline?
If you refinance your auto loan, you may be able to get a loan that has a longer payoff timeline than your current loan. This may seem like a good thing – and it can be if you’re currently struggling to make payments and want a little more breathing room.
But, there’s a problem. If you take out a longer loan, you could end up paying more in total interest and total loan costs over time – even if you get a lower interest rate. This happens simply by virtue of the fact you pay interest for longer. Increasing your total loan costs isn’t always a wise financial move. If you’re underwater on your loan already, this will also make your situation worse.
You can avoid this problem by keeping your new loan repayment period the same as the current amount of time remaining on your loan, or less. If you have 36 months left to pay your current car loan, this would mean getting a new loan that you’ll pay back in 3 years or less. If you can shorten your current repayment timeline, you could actually end up saving a fortune in total interest costs.
Does Your Current Loan Have Prepayment Penalties?
In some cases, your current auto loan will charge you a penalty for early payoff. If that’s the case, the cost of this penalty could negate some of the savings that comes with refinancing to a lower rate loan. You’ll have to do the math to find that out.
If you can save more than $1,000 in total interest but your prepayment penalty will cost you $500, it may be worth it – but if your penalty would be $1,200, then refinancing would actually cost you.
Is 2019 a Good Time for You to Refinance?
As you can see, you have a few big questions to answer before you decide that you should refinance your car in 2019. But, if you can qualify for a lower rate loan – as many borrowers will be able to do – then refinancing is definitely worth considering to help you save on vehicle costs this year.