Refinancing an auto loan can save you thousands of dollars. You may have had poor credit when you bought your car or interest rates may have declined since you purchased your last vehicle. In either of those instances, it makes sense to pursue refinancing your car.
This begs the question of if it always makes sense to refinance. If you have an older car and would like to refinance, consider the following before taking action.
Auto Refinance for Older Cars is Not Easy
Auto refinance for older cars faces one stark problem – you're asking a bank to help refinance an old, depreciating asset. You may also face two other issues: your car may be underwater (you owe more on it than it's worth) or you have subprime credit. Both of those instances, along with the age of the car, will likely result in a higher interest rate.
Those factors may result in you paying even more money to pay off the loan than if you had not refinanced in the first place. It's not impossible to refinance an older car, but there are significant hurdles. You can shop around for auto refinance options but be prepared to pay more than it's really worth in the long run.
Other Options to Consider
If you want to reduce the car payment on your older car, there are other options besides a refinance. Some of those options are:
- Peer-to-Peer (P2P) lending
- Selling the car via private party
- Trading in your car
With P2P lending, you expose yourself to potentially lower rates that typically accompany a traditional auto refinance. Some of the top P2P lenders offer rates below six percent, which can save you significant money over the life of the loan.
Selling your car may seem like it's not an option. If you want to lower your monthly payments, it can save you money each month, in certain circumstances. You may not get a lot of money out of either situation (selling your car or trading it in), but it helps provide cash for a down payment on a newer car at a lower interest rate.
How to Avoid Future Problems
An auto refinance for older cars represents a larger problem when it comes to cars – paying too much for your car. Most individuals need a car to live their life, but there are ways to reduce the overall expense.
The first way is to reduce the amount of time you finance the car. With the growth of the 84 month car loan, you may be tempted to finance your next purchase for as long as possible. That may lower your monthly payment, but you will pay more for the car over the long-term. Edmunds, for example, recommends car loans no longer than five years, and shorter if possible. The overall goal of this is to reduce the amount you pay over the life of the auto loan.
Another way to avoid this problem in the future is to build a down payment for your next car purchase. According to Edmunds, "A new car typically depreciates about 22 percent in its first year," meaning if you don't have a down payment, you will likely be underwater on the car loan within the first year of ownership.
The other way to help avoid future problems is to focus on improving your credit score if it's not considered good. Not only will this help you save on interest once you do finance a car, it will also help save on other expenses.
Getting an auto refinance for older cars is not impossible, but it often is not worth it. Do yourself a favor by searching for other money saving options both in the short and long-term.