It seems like a no-brainer to refinance your home. After all, why continue on with a 20-year mortgage at a higher interest rate when you can lower your payments. So, what about your car? Shouldn't you take the same approach? Some car buyers don't even realize this is an option, believing they have to stick with what they originally signed up for in terms of financing when they drove the car off the dealer lot. But auto refinancing is a great way to make your monthly budget more workable, but you have to take a good look at where you are and what your reasons are for doing so. We show you the best way to approach auto refinancing and whether or not it's for you.
Check Your Current Interest Rate
Before you consider auto-refinancing, take a close look at your current loan's interest rate. Is it a good deal, say under 6%? Or are you well over 6% If you're in the latter group, you should take a look at refinancing. Dropping your interest rate, if your credit score is good enough, could result in some savings for you, and that's without extending the term of the loan. If your loan was for a $25,000 for a Honda Accord at 7.75% for 60 months (5 years) one year ago, your refinance to a lower rate would look something like this:
- 4.75% for the remaining four years of the loan would save $1,373 (total) or $28.60 per month.
- 5.75% for the remaining four years of the loan would save $906 (total) or $18.88 a month
- 6.75% for the remaining four years of the loan would save $448 (total) or $9.33 a month.
Also, take a look at current interest rates to see if they've dropped enough to make a difference for you. It also behooves you to check your credit score to see if you'd even qualify.
Determine the Value of Your Car
There's pretty much no point in refinancing your car if it's actually worth less than the amount of money you owe on the loan. You'd be
Talk to your lender about how much remains on your car loan and compare it to the Kelley Blue Book value of your vehicle. If you owe less than the value of the car, you're in good shape to start looking more seriously at refinancing your car.
Auto Refinancing is Easier Than You Think
If you've been through refinancing for your home, you know it's not that simple. A lot of paperwork and possible fees, it's sort of like taking a beating to get some savings. WIth a car loan, it's much easier. There's no appraisal of your car's condition, unlike a home refi. Fees are low or nonexistent.
Do keep in mind that the car which you're refinancing is now considered a used car, so interest rates are naturally higher than those for new cars. But that doesn't mean you wouldn't qualify for a lower interest rate than what you currently have--especially if interest rates have dropped and your credit score has gone up. Having made regular and timely payments on your current loan should help you improve your score.
Refinance if Money is Tight
You can reduce your interest rate and extend the term of your loan if you qualify, which may further reduce your monthly payment, though many may find it unpalatable to pay their loans for a longer term. But if you're in a pinch for extra money in your pocket every month, it's something to consider. You also may have the option to extend the term of your loan, versus getting the interest rate lowered. This type of refinancing allows you to lower your payment, as well, though the total purchase price may actually go up when considering the full term of your loan. It's something to consider as an immediate remedy, versus a long-term one and could free up some funds.
You also may have the option to simply extend the term of your loan if you can't get a lower rate. This type of refinancing allows you to lower your payment, as well, though the total purchase price may actually go up when considering the full term of your loan. It's something to consider as an immediate remedy, versus a long-term one and could free up some funds for you in the short term.