One of the best things about refinancing your auto loan – besides lowering your monthly payment – is that it’s a relatively quick and painless process. Unlike refinancing your mortgage, there’s no appraisal and fees are minimal.
But is refinancing right for you? It may be, especially if you find yourself in any of the following situations:
1. Lower interest rates
An excellent time to refinance your auto loan is when interest rates dip below the current rate that you pay on your loan. Experts say that refinancing is often a good decision if interest rates have dropped more than a couple of points since you purchased your vehicle. But even a percentage point or two can save you money over the life of your loan.
It’s best to replace your existing loan as soon as a lower interest rate is available because rates are typically more favorable for newer vehicles while some lenders won’t allow you to refinance if your car is over a certain age.
2. Your credit score has improved
Your credit score is one of the primary factors that determine your auto loan’s interest rate. A credit score takes into account many things, from your debt-to-income ratio to how timely you are in paying your monthly bills.
If your credit score was low – or if you had no credit – when you bought your car, but it is healthier now, it may be the right time to refinance your auto loan. Interest rates on your loan can be as much as 20% and higher if your credit score is below average.
There is a variety of ways to improve your credit score, including making on-time payments for an extended period, and you should make it a point to check your score for errors that may be dragging it down.
3. You’re making more money
Whether it’s because of a promotion or a new job – or you have an additional source of money – you may be making more money now than when you originally financed your auto loan. Regardless, having a higher income is an ideal opportunity to refinance your loan. A lower interest rate combined with the ability to make higher monthly payments is an excellent way to pay off your loan faster.
4. You’re struggling financially
On the other hand, your finances may have taken a turn for the worse since you purchased your vehicle. Refinancing your auto loan can lower your car payment and ease some of the stress on your finances. It can result in a potentially longer loan period, however, so you should take that into consideration, as well.
5. The time remaining on your loan
While refinancing your auto loan and extending the term of the loan can lower your monthly payment, you may also pay more interest in the long run. You also run the risk of going “upside-down” on your loan in which you owe more for your car than it’s worth. However, refinancing to a lower rate for the same term – or shorter – will help you pay less overall.