It's common for consumers to pursue a home refinancing loan to get a significant reduction in their monthly mortgage payments. Even though auto refinancing is not quite as well known, it could be to your advantage to consider it. With a lower APR on your auto finance loan, you could save some money – and have a little extra to play with each month.
By refinancing your car loan, you'll get a better interest rate and your monthly payment will drop. In the long run, you'll not only save money, but maybe even pay off your car quicker. In fact, there are many potential benefits to an auto loan refinance that it just doesn't make sense NOT to consider it.
If you bought a car when interest rates were high and they've recently gone down, or you'd like to see if you can get a better rate than you have now, here's what you need to know.
Should You Refinance?
Not everyone should pursue auto loan refinancing. In general, experts recommend the following: If you see that interest rates have gone down by one percent (or more), consider applying for a refinance loan. You can use an online calculator to estimate how much you could save with a small but significant one percent drop in interest rate.
Here are some other scenarios when it makes sense to refinance your vehicle:
- The interest rate drops. Keep in mind that refinance loans are usually considered used car loans, so the rate will almost always be higher than when buying a new car.
- Your credit score increases. If you've been penalized with an outrageous interest rate for your vehicle because of a few negatives or no history on your credit report, having an improved score can get you a lower interest rate. If you've been making on time payments and you know your credit rating has improved, go after an auto loan refinance.
- You didn't get the best interest rate. Even with good credit, sometimes loans come with a higher rate (for example, if you got a dealer-sourced loan).
- You need lower payments. If you're having financial difficulties and need to free up some money each month, refinancing your car could bring in a few additional dollars.
- You want to buy a leased vehicle. After the lease ends, you'll need to finance the car.
What You Shouldn't Do when Refinancing
Certain risks are inherent when refinancing your car. For example, it may be possible to lower your monthly payment by lengthening the loan on the car; however, in the long run, you'll be increasing the overall cost of the loan and spending more money.
If your vehicle is older, it's also better to keep your existing loan. For older vehicles, the resale value will be low, causing creditors to limit your options for refinancing. Refinancing is best done when the car is newer. Because interest payments are loaded onto the front of a loan, it makes the most sense to refinance a newer vehicle in order to get your money's worth and save.
Read your loan agreement carefully. In some cases, prepayment penalties may exist that will make it costly to refinance. For example, a clause that requires you to pay the principle along with the total interest – even if you pay off the loan early – will result in a higher cost to you. The best bet: Get expert advice before seeking an auto loan refinance to avoid an undesirable financial situation.
How to Save Money when Buying a Car
No matter if you're buying a new or used car or refinancing your auto loan, consider ways to save money when buying the car:
- Put money down. Every additional dollar that you can put down on the car will mean you can borrow less. Look at the next few months of your budget and set aside any extra money (like a tax refund or work bonus) to put towards the down payment.
- Improve your score. Before you buy a car, get to know your credit score. If it's not good, you won't be offered a reasonable interest rate on the auto loan refinance. If you can raise your score, the interest rate will generally be lower. If you need to – and you can spare it – take the time you need to build up the score so you can access affordable, low interest rates.
- Pay more. Once you secure the loan, do what you can to make extra payments. Even $20 a month more will lower the balance – and help pay off the car a few months – or even years – early.
Refinancing your car is a viable option for lightening the financial load of your household. Just be sure your credit is good, get some advice about the fine print of your loan and then secure an interest rate that will bring down your payments, help you pay off the car sooner, and save.