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Were you happy with your car loan when you got it? Not many are, so you might consider refinancing.
Let’s be honest: no one enjoys forking over their car payment each month. Unless you have tens of thousands of dollars available to buy a car in cash, though, an auto loan is a necessary evil. Long after the new car smell has worn off, those monthly car payments will still remain. On top of auto insurance and maintenance, though, this can mean that your vehicle-related expenses really pinch the budget and impact your household finances.
We polled hundreds of RateGenius customers to see when they realized refinancing their vehicle could be a smart move and surprisingly, 33% said they knew they needed to refinance the car within 1 month of purchasing it.
Lowering your monthly car payment is most often accomplished with a refi: by refinancing your auto loan. Depending on your credit and the specifics of your auto loan, this is usually a pretty easy process.
However, there are times when a refi makes more sense than others, and a few things to watch out for before you begin the process of refinancing your own auto loan. Let’s take a look at what a refi does, why you want one, and what you should keep in mind when you’re shopping around for the perfect new loan.
The What and Why of Refinancing
When you refinance, you are essentially taking out a loan in order to replace another loan. The purpose? To save yourself time, money, or both on the repayment.
Applying for a refinanced auto loan is similar to taking out the original loan. You will need to provide financial information such as your monthly income and expenses. The lender will also run your credit in order to determine the rate for which you qualify.
When picking a rate for your new loan, the lender will also take into account the new terms you request; typically, shorter loan lengths qualify for lower interest rates.
Once you’re approved for your refinance, the new lender will fulfill your original loan. This means that they will pay it off directly and your original account will be closed and satisfied. The new loan will begin at that time, and your monthly payments will now be directed to your new lender.
How Refinancing Can Save You a Lot of Dough
You could refinance a loan in an effort to lower monthly payments, if you want to create more wiggle room in your budget. You could also refinance a loan if you wanted to score a lower interest rate. This is a great option if market rates have dropped since taking out your loan, or if your credit has improved and you now qualify for a more competitive rate.
Sometimes, you can actually do both.
For this reason, there are both short-term and long-term savings involved with refinancing your auto loan. You can save money immediately by choosing a refi that lowers your monthly payments. This allows you to put that extra cash to work elsewhere, such as building up a savings account, paying off credit card debt, etc.
Want to know just how much this will trim from your annual spending? Well on average, RateGenius saves people a whopping $936 a year.
In the long-term, you’ll save even more by reducing your interest rate with a refi. This means that you’ll pay less in total over the life of the loan, making your car purchase essentially cheaper.
Who Should Refinance?
There are plenty of reasons that you should consider refinancing your auto loan. In fact, it’s a great option for almost every borrower at some point in the course of their repayment.
If you want to pay less in interest over the life of your loan, you can refinance. This is especially true if interest rates have dropped across the market or your financial situation has improved since you originally took out the loan.
You can often also get a lower interest rate if you refinance your loan with a more aggressive repayment schedule. While this won’t free up as much cash on a monthly basis, it will save you more in the long run.
Chances are, your credit score is different today than it was the day you took out your auto loan, even if the change is slight. If your score is significantly better, though, a refi is worth the effort.
Is your goal to lower your monthly payment? Then a refi can help. This is an excellent option when you need to improve your cash flow or free up funds for another reason.
Refinancing your auto loan with a lower interest rate or choosing a longer repayment schedule can often reduce your payments, creating more wiggle room in your budget.
Did you take out your original auto loan with a cosigner? Over time, you may want to release them from the obligation of your loan (or they may want to be removed), in which case a refi is your best option. By refinancing your auto loan, you can easily remove your cosigner from the debt… and hopefully, your positive repayment history will also earn you better loan terms in the process.
There is one thing to watch out for when planning a loan refinance, though.
If your original loan doesn’t have what’s called a prepayment clause, you may be unable to proceed — or if you do, you might be subject to significant fees. Prepayment, or early repayment, penalties are designed to lock you in to the terms of the original loan.
This means that you may be fined for doing things like overpaying each month, or paying off the loan ahead of schedule (like you’d technically do with a refi).
If this is the case, you need to be sure to read the fine print of your original loan. In some cases, you may still save more with a refi than you’d pay in fees for early repayment; other times, it’s not worth the penalties. If you have a prepayment clause in your original contract, you should be good to go, but if not, call your original lender and see how much a refi will wind up costing you in penalties.
When Should I Refinance?
There are times when refinancing your auto loan makes more sense than others. But you should also know that you can refinance as many times as you want!
When considering a refinance, sooner is usually better than later.
Not only will an earlier refi save you more money over the course of the loan than a refi toward the end of the repayment, but it also gives you the opportunity to refi again down the line.
It’s also important to refinance earlier on so that you aren’t limited by the vehicle’s specifics. For instance, many lenders will only refinance an auto loan up to a certain number of miles or the vehicle’s age.
Here at RateGenius, we will refinance all the way up to 100,000 miles and 10 years, but other lenders may offer much less. Plus, if your vehicle was used when you purchased it, you will be even closer to these limits!
You’ll also need to watch out for the vehicle’s value, which decreases every day and with every mile you drive. Many lenders set limits on the refinance loan amount compared to the vehicle’s value, called the loan-to-value ratio (LTV).
If your LTV is too high — meaning that you’re asking to borrow too much compared to how much the vehicle is actually worth — you’ll be denied.
If interest rates are down overall, you can often get much better loan terms than when you bought the vehicle, even if your credit hasn’t changed much.
Refinancing Your Car Loan
The idea of refinancing may seem daunting, especially if you’re content with your current repayment schedule. However, by taking a look at the amount of money you could save both monthly and in the long-term, a refi is usually well-worth the effort.
Timing your refi correctly is key.
You’ll want to move sooner rather than later, take advantage of economic shifts, and definitely act if your credit score sees a marked improvement. By doing so, you can score the lowest rate, and best terms, possible… and save the most money along the way!