What reasons do you have to refinance your car? When you choose to refinance a vehicle, you have decided to tack on an additional loan as a way of paying off the existing balance that you have on your current loan. When you do this, you can lower your financial burden because you can get a better rate with a different car loan. The payments for the car get set up for months—normally, this happens over a couple of years. More often than not, refinancing your car loan can make a HUGE impact on the amount you save when paying off your vehicle. Let's have a look at some of the reasons that someone might refinance their car loan.
Reason #1: The Interest Rates Have Dropped Since the Original Loan
The rates on loans change regularly, and in some cases, you could be paying more unnecessarily on a loan from a later time when the interest rates were higher. Some people who have refinanced their car loan have reported drops between two percent to four percent. You will see significant savings over the lifetime of your loan.
How do lenders determine your loan rate? You have several factors that will play into this. Some of the elements that could come into play when lenders determine your interest rate include:
- The length of the loan term
- Credit score
- Age of the car that you will finance
- Depends on the financial institution
- Dealerships and brands offer financing options
- Debt-to-income ratio
These are all factors that lenders will look at when they determine the amount of risk that they face for lending to someone. Typically, the more risk-averse banks won't give you a loan if you have a credit score from the lower 600s to the middle 600s. With dealerships, you have some brands like GM and Ford that offer lower interest rates on their loans.
Normally, lenders will determine your interest rates using a variety of factors. For that reason, if your credit score improved, you could be entitled to getting a better rate on your loan. When your credit score goes up, and your DTI ratio goes down as well, you can get a much better rate with more favorable terms on your loan.
#2: You Didn't Get the Best Offer the First Time Around
Let's say that you didn't get a great loan the first time around. Perhaps one of the several factors have improved, and this means that you could negotiate a more favorable loan. Let's take an example where the interest rates on your first loan reach up to seven percent. You didn't realize it at the time, but you had other lenders giving you a much better deal on the loan interest rates. Keep in mind that if you happened to finance your auto loan from a car dealership, you could be paying higher rates on the loan. Maybe at the time, you had a poor credit score, and you couldn't get an auto loan from anywhere else. In this example, it might be favorable if you were to refinance because you could get a lower interest rate that makes your financial obligation a little less.
#3: You Can't Keep up with the Bills Every Month
Another one of the important reasons why people have chosen to finance is because they can't afford the monthly payments. Let's say that you get swamped with bills every month, and you have a hard time maintaining your equilibrium with the current state of your finances. One of the ways that you could lower your payments is by refinancing your auto loan. It may be worth it in some cases because you can lower your overall monthly payment to a more agreeable billing. Let's say that you can't even necessarily lower your monthly interest rates. You might feel frustrated. In some cases, you can check to see if you can lengthen your payments over a while to help lower the monthly payments on your auto loan. Renegotiating the payment period can make things more manageable. Nevertheless, you should always understand how a longer payment period may have lower monthly payments, but you will typically pay more for these payments over the long term. However, you should check to make sure that you don't drastically overpay. You can use this formula to figure out what you will pay in total, and you can compare to ensure you don't overpay:
Monthly Payments x Duration = Total
#4: The Car is Aging
Even if you can make a thousand-dollar saving over the long term, the amount saved could be worth your time on refinancing the auto loan. For example, let's say that you bought a brand-new Tesla for around $25,000. You agreed to pay this amount for five years. However, your interest rate at the time sat at around 7.75 percent. If you were to refinance your auto loan, you could lower the percentage down to 4.75 percent. This saves you $30 every single month. If you shorten the term, you can also save on the interest rate, but you should be prepared to pay a little more each month if you were to choose this option. In some cases, the car has aged past the point where it would make sense to refinance, however, and you might be better off staying at the current rate in some cases.
When Doesn't It Make Sense to Refinance
In some cases, refinancing your auto loan may not make as much sense as what you'd like. You have times where you may want to stick with your current auto loan, and it's essential to establish the reasons for not refinancing also because you can determine if it makes sense to refinance the loan or not. Let's look at the reasons to stick with your current auto loan.
Reason #1 Not To: You Will Need More Credit in the Future
Let's say that you want to apply for a mortgage or something. You can't afford to have bad credit because you don't want the bank to turn down your application for a mortgage. In these cases, it doesn't make sense to refinance an auto loan because you will suffer a hit to your credit score. An inquiry will typically lower your credit score by a few points. It depends on the scoring model, but inquiries will generally count as a single inquiry. However, you should stay alert to this fact.
Reason #2 Not To: The Fees Outweigh the Benefits
You must look out for any types of fees that can come from refinancing an auto loan. For example, you may have to pay a prepayment penalty when you decide to refinance. Paying off your original loan earlier than planned could come with more fees than what it's worth. As a result, you will have to pay some additional interest added to the original loan, which makes it even more expensive. In particular, you should watch out for loans with precomputed interest because this makes you pay off all the interest on the loan along with the original. With loans like this, you will also encounter fees that go along with it. This means state re-registration fees will come with it. However, these fees usually won't cost you more than $85 in total. We can't say that this will be ridiculously expensive, but you should pay attention to the total that it will cost to refinance before you decide to take this on.
Reason #3 Not To: You Have Paid off Most of the Loan
Let's say that you have put down a lot of money on the loan. You have most of it paid off. Taking a look at how the interest works on the loans, you often pay off the interest on the loan right from the beginning. This means that the longer you have waited to refinance a vehicle, the less that you will save on the interest loan.
Reason #4 Not To: You Have an Older Car
Many times lenders won't even let you refinance a car that is over seven years old or has 75,000 miles on it. Cars have been known to depreciate fast, which is why it typically makes sense to refinance it within five years.
Is Refinancing Worth the Extra Effort?
Under some circumstances, refinancing may not make much sense if you have the above reason not to, but in many cases, if you can save on the interest rates, you could be better off paying off your original loan to get a better interest rate. You can free up your cash flows so that your financial life runs more smoothly.
When you go to refinance, you should understand that you will have to fill out the following information again:
- Loan information
- Financial information
- Information about your car
- Information about your loan
After you have submitted your information, the lender will decide if they want to approve you for another loan. After the lender submits his approval, you can make the payment directly to your original lender. Luckily, nowadays the process has become highly automated, and you will see results within minutes on whether you have been approved or not.
In some cases, they may send you the money directly. However, this isn't free money, and you will be directly responsible for paying off the current auto loan. You should also be aware that a failure to do this will result in you having to pay two loans instead of one. Here at Valley Auto Loans, we can help you refinance at a more favorable rate.