If you financed your car when you purchased it, you may have the option to refinance your auto loan for more favorable terms. Refinancing makes it possible to lower your monthly car payments, change the length of the loan, or lower the interest rate.
Unlike refinancing a mortgage, which can cost you thousands of dollars in appraisal and closing costs, refinancing a car loan is a relatively simple and inexpensive process. You don’t even have to have made a certain number of payments first—you can refinance any time!
Refinancing earlier in your loan might be best because earlier payments are mostly interest payments, while payments toward the end of your loan mostly cover the principal. So, the earlier you can save on your loan (and therefore interest payments), the better. Interest rates are generally better for newer cars, which can also help you get a better loan if you refinance early.
Here are some factors to consider if you’re thinking about refinancing your car loan.
Interest rates have lowered
Interest rates have been low for some time, so if your loan has a rate of around 5 percent or higher, it’s worth investigating to see if you can reduce that interest rate. Depending on the terms of your new loan, you might save thousands in interest payments (and have a lower monthly payment, too!).
Your credit score improved
One of the main factors that determine your interest rate is your credit score. The lower your score, the greater of a risk you are to lenders. So if you’ve been able to increase your credit score since buying your car, look into refinancing for a better interest rate.
You didn’t shop around when you bought your car
While you shopped around for the car itself, you might not have spoken to various lenders to see what sort of financing you were eligible for. Many car buyers simply choose the financing option the dealer offers, but banks and credit unions offer competitive rates. See if you can get a better loan, and consider this a lesson for the next time you buy a car or a home—always shop around before you select a loan! It’s easier than you think as you can pre-qualify for auto refinancing in minutes online.
New loan terms could mean huge savings
Because refinancing an auto loan is a relatively uncomplicated process, it’s almost always worth looking into it if your financial situation has changed since you bought your car. Better loan terms can save you thousands of dollars with minimal effort on your part!
If you’d rather just pay off your existing loan faster by increasing the amount you pay each month, keep in mind that some loans have prepayment penalties, which are fees you’d have to pay if you pay off your loan before the end of the loan term. Read the fine print and consider refinancing as a way to avoid this fee while still paying your loan off more quickly.
Ultimately, lowering your interest rate on your car loan, shortening the term, and paying off your car loan faster can help free up monthly cash flow. Once your car loan is paid off, what else could you do with that money?