With cars getting more expensive over time it’s no wonder a large portion of the population is in automotive-related debt. According to CNN Money, 107 million Americans have auto loan debt, which is about 43 percent of the adult population in this country. Many of those auto loans aren’t the best deal for the borrower, meaning many people are looking at auto refinancing.
Auto refinancing can be a smart option, but it doesn’t make sense for everyone. In order to give you the knowledge you need about refinancing your car loan, we’ve pulled together the necessary information to help you decide whether refinancing makes sense for you.
What is Auto Refinancing?
Many people have never refinanced an auto loan, and don’t actually understand what it means to refinance. Essentially, when you refinance, you’re taking out a new loan to pay off an existing one. In the case of auto refinancing, your car is used as collateral for the loan.
When you refinance, you sign a new contract between the lender with a different (usually lower) interest rate depending on your credit score, loan period, and monthly payment. The difference between the interest rate, loan period, and payments can vary dramatically from your original loan and can be advantageous to you if your credit score falls into the good or excellent category (photo: Aol.com).
Why and When Should You Refinance Your Auto Loan?
The main reason why you’d want to refinance your auto loan is that you will save money. Oftentimes people get stuck in an auto loan with interest rates, a loan period, or monthly payments they aren’t thrilled about. Auto refinancing is a way to get out from under a bad loan situation and make your life more manageable.
There are multiple reasons to consider auto refinancing. While everyone’s situation is different, if any of the following things apply to you, it may be time to consider refinancing your auto loan:
- Car Loan Interest Rates Are Better
Interest rates go up and down. If you were in the unfortunate position of having to buy a car when interest rates were high, refinancing can be a way to take advantage of lower interest rates. Keep an eye on auto loan interest rates and if you notice they’re much lower than when you bought your car, consider refinancing to lower your payment.
- You’ve Improved Your Credit Score
It happens all the time. Someone buys a car when they have a bad credit score and then spends the next few years improving their score. All the while they’re still paying a high interest rate on their auto loan. Refinancing once you’ve improved your credit score can be a way to reduce your interest rate and pay less.
- You Settled for a Bad Interest Rate
Sometimes people make bad decisions. Even if you purchased your car when interest rates were low, you may have got a loan with a fairly high interest rate. In this case, refinancing your auto loan can be a way to get out from under a high interest rate.
- You’ve Experienced a Financial Setback
If you bought a car when you had a high paying job and have since been laid off or had some other unfortunate financial setback, refinancing your auto loan can be a way to still pay off your car. Refinancing can be a way for you to reduce your monthly payment, which can help you get back on solid ground financially.
- You Want a Shorter Loan Term
Oftentimes, people get roped into car loans with very long repayment periods. Sometimes these can be as long as 84 months (seven years). Generally, a loan period of this length is a bad idea. Auto refinancing can be your path to paying off your car in a few years instead of the better part of a decade.
How Do You Refinance?
If you’ve looked over the list of scenarios above and have decided that refinancing your auto loan is a smart decision, you’re probably wondering how exactly do you refinance? It’s important to take a methodical approach to auto refinancing. This will ensure that you get the best deal and keep you from needing to refinance again down the line.
There are many guides and online tutorials out there on how to refinance your auto loan. Here are the five auto refinancing steps we suggest you take to ensure you get the best deal on your new auto loan.
1. Gather Your Current Loan Information
Before you can go about collecting auto refinancing options, it’s important to have a clear understanding of your current auto loan situation. Gather your current loan information and look it over before doing anything else. You can find basically everything you need on your monthly statement. Look at your current monthly payment, how much time you have left on the loan period, and the loan’s interest rate. If you see anything that doesn’t make sense or get confused, either contact your financial adviser or the lender with questions.
2. Check Your Credit Score
The next step is to check your credit score. If it isn’t very good, auto refinancing might not be for you. Instead, you should take steps to improve your credit score. Once you do that, you can refinance and be sure to get a better deal. If you check your credit score and find that it’s good, then you can move to the next step.
3. Calculate Your Expected Savings
With your credit score in hand and your current loan information, you should be able to crunch some numbers and determine what kind of results you can expect from by refinancing your auto loan. There are numerous auto refinancing calculators out there that can help you get a rough estimate for how much you can save. If you find that you won’t save much, auto refinancing may not be for you.
4. Reach Out to Lenders
If you crunched the numbers and have determined that you can save a fair amount of money by refinancing your auto loan, then you’re ready to start reaching out to lenders. It’s smartest to contact multiple lenders so you have several potential options. Don’t simply go to one or two places and expect them to work miracles. In order to get a good deal, you’re going to have to do your homework.
5. Consider Your Options
Once you’ve reached out to several different lenders, you can wait to hear back with their offers. Many of them will make you an offer and want you to sign a deal right away. Don’t jump at the first refinancing deal thrown your way. Let the lender know that you’re shopping around and want to make sure you’re getting the very best deal. This will ensure they'll make you the best possible offer and keep you from signing up for a sub-par refinance loan.
Be Realistic About Your Auto Refinancing Options
Refinancing your auto loan isn’t a surefire way to financial prosperity but it can help (infographic above from FiveCentNickel). You’ll still have to pay the loan back, and your current loan may come with prepayment penalties. While many reputable lenders don’t have prepayment penalties, some do. This means you may have to pay additional fees to your original lender if you choose to refinance.
Also, if your car is very old or has a lot of miles racked up on the odometer, you may not be able to refinance. The amount of money left on your original auto loan can have an impact on your ability to refinance, too. Most lenders will not refinance an auto loan that only has a few thousand dollars left on it. Most lenders set this minimum loan limit somewhere between $5,000 and $7,000 dollars. If your loan is more than that, you should be fine to refinance. All lenders are different, though so when you’re reaching out, you need to make sure that you qualify for refinancing.