Is It Time to Refinance Your Auto Loan?
Are you thinking about refinancing your auto loan? Perhaps you purchased a car a few years ago when interest rates were higher. Or maybe you recently financed your car through a dealership, but now you've found a much better interest rate through your bank or credit union. It's possible that your credit has improved since you took out your auto loan, and you believe you could qualify for a better interest rate. Whatever your reason, refinancing your auto loan at today's low interest rates could save you a significant amount of money, and it's generally easy to do.
Is refinancing worth it?
Refinancing your vehicle could potentially reduce your monthly payment, and save you money on your interest charges. For example, let's say that you purchased a car one year ago and your remaining loan balance is $25,000. Your current loan rate is 5.99% and your remaining loan term is 48 months. You decide to refinance your remaining balance and you qualify for a 2.99% loan rate. You'll reduce your monthly loan payment by approximately $34 per month (from $587 to $553), and save approximately $1,621 in interest charges over your remaining four-year loan term.
Of course, the lower the interest rate you can get, the more money you may be able to save. In general, getting the best interest rate will depend on the following factors:
- Your credit score. To get the best rate, you will probably need to have a top credit score.
- The age of your vehicle. Newer cars will generally qualify for lower rates. If your car is only a year or two old, you might even qualify for the same low rate that applies to new car purchases.
- The loan term. Generally, the shorter the term, the lower the rate.
What about refinancing costs? Refinancing costs for an auto loan are generally minimal--less than $100--because they're typically limited to title transfer fees or processing fees. But read your current loan documents--though it's not common, lenders occasionally charge prepayment penalties.
Because you pay more loan interest up front, you'll generally save more if you refinance toward the beginning of your loan, rather than toward the end. If you can afford it, one worthwhile strategy is to refinance into a shorter term than your existing loan term, because you'll save even more in interest charges. Alternatively, if your goal is to reduce your monthly payment as much as possible, you might refinance into a longer term. However, it may not be wise to extend the term of your loan, because even though your payment will be lower, you may end up paying a lot more in interest over the life of the loan.
Shop around for the best deal
Before you refinance your vehicle, do your homework by comparing interest rates and terms offered by various lenders, and find out if there's a minimum amount you must finance. Your first stop might be your current lender, who may be willing to refinance your vehicle at a lower interest rate to keep your business. While lenders will often refinance loans they already hold, special interest rates and conditions may apply. Another option is to apply for a loan at your current financial institution. You may receive a discount on the loan rate if you have direct deposit or a savings or checking account, or agree to pay your bill automatically or online.
Once you've selected a lender, you can often apply for a vehicle loan and complete the entire transaction online. To apply for a loan, you'll generally need the make, model, and year of your vehicle; the vehicle identification number; the current payoff and remaining term; and proof of insurance. And before signing any paperwork, make sure you read the loan contract and understand the terms of your new loan agreement.