While refinancing an auto loan can result in lower monthly payments, borrowers should investigate whether it makes sense in the long term before committing to auto loan refinancing. Refinancing an auto loan will pay off the existing loan with a new loan from a different lender, often with different terms.
The best time to refinance an auto loan can depend on the borrower's situation or the market conditions. Here are five situations where you should consider refinancing an auto loan.
Your Credit Has Improved
The primary factor that determines whether a consumer is eligible for an auto loan is credit score. The equation is simple: consumers with bad credit will receive a high interest rate, and consumers with good credit will receive a lower interest rate.
Consumers can improve their credit scores by paying bills on time, paying off debt and credit card balances, and refraining from opening new credit cards. With enough improvement, consumers may qualify for a significantly lower interest rate on an auto loan, which would reduce monthly payments and the amount of interest the borrower would pay over the life of the loan.
Interest Rates Go Down
Interest rates can vary, and borrowers should keep an eye on the market to watch for interest rates to go down. If they drop below the rate on your auto loan, this would be a good time to ask a lender how refinancing at the lower interest rate would change your monthly payment.
Your Loan Is Upside Down
You may find yourself in a situation where the amount of money you owe on your auto loan is more than the value of your vehicle. This means if you trade in or sell the vehicle, the money you receive won't cover the balance of the auto loan. Refinancing the loan won't correct the situation immediately, but it will help. Making a few extra car payments should bring the loan down to the value of the car within several months, and at that point you can use auto loan refinancing to drop your monthly payments.
You Need to Reduce Your Monthly Expenses
Life situations, such as loss of a job or unexpected medical bills, can tighten your monthly budget. Lower auto loan monthly payments can free up money to put toward other expenses. Refinancing will stretch the repayment period of your remaining balance over a longer period and lower your monthly payment, and a lower interest rate could decrease you payment even more.
Your Auto Loan Is from the Dealership
Your dealer may have given you a great deal on the price of the car, but dealerships' financing departments don't typically provide the best financing. If your loan is from a dealership, you're likely to find a better auto loan refinancing deal from another lender.
As with any loan, consumers should research their options before refinancing. In some cases, a new loan may offer a lower monthly payment, but the consumer will end up paying even more interest over the life of a new loan. A good place to start as you look for refinancing options is LendingTree, where you can compare refinance offers from different lenders to find out whether refinancing is a good choice for you.