Interest rates are at record lows these days, and that means now is a great time to consider refinancing. This is especially the case for people who have taken out auto loans, particularly those who took out their loans at relatively high rates. Depending on your personal circumstances, now may be a great time to refinance an auto loan. Continue reading for a full guide on refinancing your auto loan today.
Before any further discussions, let’s define what it actually means to refinance a loan. Refinancing means that you replace an existing loan with a new loan that has more ideal terms, such as lower monthly payments or better interest rates. The idea here is that you benefit from the differential on the new loan, which helps you save money in the long run. Refinancing is popular in times of low interest rates, as you are more likely to find lenders willing to offer you more preferential terms.
REFINANCE IF YOU’VE IMPROVED YOUR CREDIT
Refinancing is a great approach if you have improved your credit score. When you go to take out an auto loan, one of the first things a lender will ask for is a credit check, as this can help them to assess your credit worthiness. If you have poor credit, you are a riskier client, so you will be assessed a higher interest rate. On the flip side, if you have good credit, you are less of a risk, so you will likely have a lower interest rate, which will ultimately save you a lot of money.
REFINANCING MAY NOT ALWAYS MAKE SENSE
While refinancing is a great option, it may not always make sense. Ultimately, your personal circumstances and the conditions under which you took out the original auto loan will dictate whether or not refinancing actually makes sense. Here are some things to consider:
- Condition of the car – if your car is in poor condition, then lenders are less likely to be willing to refinance your loan; additionally, if you just purchased the car, it will not make sense to refinance since your credit score probably has not changed in a meaningful way
- Exit costs – your current loan may lead you to incur significant charges when transferring or exiting the loan, and this expense may be such that the new terms may not be worth the hassle
- Repayment timeline – if the timeline is extended, you may end up paying more even though your interest rate is lower; be sure to do a comparison before agreeing to the new terms
As you can tell, there are a number of conditions that make refinancing not preferable, so be sure to think through whether or not refinancing makes sense given your individual circumstances.
Overall, refinancing is a great option for people who have improved their credit in the time after which they initially purchased their car. However, understand that refinancing does not work in every scenario, so knowing when this would or would not make sense is just as important as knowing that the option exists!