Refinancing Your Car Loan: What to Know
It’s normal to have questions about refinancing, especially if you’ve never refinanced a car before. “If I refinance my car, what happens?” you might ask. “Will refinancing save me money?”
While refinancing can lead to savings, it also has its costs. Read on to learn when to refinance a car loan and how to determine if refinancing is the right choice for you.
What Does Refinancing Mean?
Refinancing means replacing your current loan with a new one that has a different term and interest rate. It can be a way to lower your monthly car payments, save money on interest, or extend the terms of your loan. Borrowers can refinance through their current lender or work with a new one.
What happens when you refinance a car? Essentially, you’ll receive a new auto loan that you can use to pay a car loan off early. Refinancing can be a smart financial decision, but it’s important to look at the big picture before securing a new loan.
When to Refinance a Car
You may want to refinance a car loan if interest rates have gone down or your credit has improved. If you’re unhappy with your current lender or believe that you can get a better rate with a new loan, it’s worthwhile to explore your options. It can also be a good idea to look into refinancing if you’re struggling to cover your current car payments.
While refinancing can be beneficial, it also has drawbacks, which is why it’s important to think about when to refinance your car. It might be best to avoid refinancing if interest rates are on the rise or if you’re close to paying off your current car loan. Ideally, it’s generally a good idea to wait at least six months before refinancing an auto loan.
Pros of Refinancing Your Car
Is it a good idea to refinance your car? Depending on your circumstances, refinancing could help you in a number of ways. Here are some of the major upsides to refinancing an auto loan.
- Refinancing can lower your monthly payment: Extending the terms of your loan or securing a loan with a lower interest rate could reduce your monthly car payment. If you’re struggling to afford your car payment or want to pay off other debts, refinancing might help lower your monthly expenses.
- You can reduce the terms of your loan: Refinancing can also be a way to pay off your loan early without making extra payments. If you’re able to secure a new loan with shorter terms, you could wind up putting less money towards interest.
- It can give you a lower interest rate: If interest rates have lowered since you obtained your current car loan, or if you obtained your car loan from the dealership, you may be able to qualify for a better interest rate.
- You could tap into your car’s equity: Does the current value of your car exceed what you owe? A cash-out refinance loan would allow you to take advantage of that equity and secure extra funds.
Cons of Refinancing Your Car
Refinancing isn’t always advantageous. It’s important to consider the drawbacks of refinancing before talking with lenders.
- It could lead to a higher monthly payment: If you choose to shorten the terms of your loan, your monthly payment could rise, even if you’re able to secure a lower interest rate. You’ll want to think about what you can afford to pay before obtaining a new loan.
- You could pay more in interest: Increasing the terms of your loan can bring down your monthly payment, leading to savings in the short term. In the long-run, however, you could wind up paying significantly more in interest.
- There may be costly fees: Depending on the lenders you work with, you may have to pay refinancing fees. Some lenders also charge penalties for paying off a car loan early.
- It may not be worth the effort: Refinancing can be a time-consuming process. If you’re not able to qualify for a significantly better loan, you could be wasting your time.
How to Refinance a Car
If you’ve decided that refinancing is the right choice, your next step is to figure out how to refinance your car. Start by reviewing your current loan and checking your credit score. Once you have a better picture of your credit, you can gather the necessary documents and submit loan applications to car refinancing companies.
It’s best to shop around and compare offers from different lenders so that you can find the best interest rates. If you submit all of your applications within a 14-day period, it shouldn’t have a negative impact on your credit score. When you’re confident that you’ve found your best offer, you can submit an application to the lender and refinance your vehicle.
It isn’t always easy to determine when to refinance an auto loan. Refinancing could potentially lower your monthly payment or your interest rate, but it isn’t always the right choice. If you have questions about refinancing, don’t hesitate to reach out to Island Federal! We can help you find your best auto financing options.