When Should You Refinance Your Auto Loan?
When you’re approved for an auto loan, you’re not necessarily stuck with that loan for life. If you refinance your loan with a new lender, you could end up saving money in the long run by getting a lower interest rate or lowering your monthly payment. As with any major financial decision, it’s best to take some time to evaluate whether or not refinancing make sense for you and your unique situation. If you’re unhappy with your current auto loan, refinancing might be the right choice for you. But how do you know when you should refinance?
Refinancing could be right for you if you’re looking to:
Lower Your Interest Rate
If you’re struggling with a high interest rate, refinancing your auto loan could help save you money, especially if interest rates have dropped since you originally took out your loan or if your overall credit health has improved.
If your credit has improved since you were approved for your current loan, you will likely qualify for a lower interest rate when you refinance. Even if you have only had your current loan for as little as a year, your score may still have improved from making regular on-time payments on your loan, so it’s worth checking if your scores have risen enough to qualify for a lower rate.
Lower Your Monthly Payment
If your monthly payments have become unaffordable, it might be time to consider refinancing. Refinancing can help you lower your monthly payments by lengthening the term of your loan. This means it will take longer for you to pay off your loan, but the amount of your monthly payments will be reduced, making your monthly finances more manageable.
Bear in mind, however, that while lowering your monthly payment benefits you in the short term, lengthening the life of your loan could put you at greater financial risk if you’re still paying it off after the value of your car has depreciated considerably.
If you need to reduce your monthly expenses, but don’t want to be stuck paying off your loan after your car has lost most of its value, refinancing your loan could still benefit you. Consider refinancing now, then increasing your monthly payment once your financial situation has improved. That way, you can still pay off your loan sooner rather than later.
When Not to Refinance
If you owe more on your car than what it’s worth, also known as being upside-down on your current loan, you may find it difficult to locate a lender who is willing to refinance your loan. Typically, lenders are more willing to work with you when your car is worth more than your remaining loan balance.
If your current loan has any prepayment penalties, that can cancel out the benefits of refinancing. Find out if your current lender charges any fees for paying off your loan early, and determine if those costs outweigh the overall benefits of how much you would save by refinancing.
Some lenders have model year limits for refinancing, so if you have an older car, you may find there aren’t as many lenders who are willing to let you refinance. Check with multiple different lenders to see what limitations they may have based on model year.
It’s important to make sure that when you refinance, you will improve your financial situation, otherwise it won’t be worth it. For example, lowering your monthly payment can make finances more manageable on a monthly basis, but if extending the loan results in significantly higher interest costs, you aren’t actually saving any money.
Are you considering refinancing your auto loan? Refinance and save with Robins Financial to drive home your savings. To find out how much you could save, give us a call or stop by one of our convenient branch locations. If you’re ready to refinance, you can apply online today.
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