Is it worthwhile to refinance a car loan? The simple answer of "yes" might apply to all car owners locked into less-than-favorable loans. But knowing when to refinance a car can make the difference for prudent borrowers. There are common, sensible reasons for considering auto or truck refinancing:
- The consumer settled on a poor rate on the initial loan because of credit problems.
- The term on the first loan is too long and the car is aging.
- The borrower's overall financial well-being has improved.
- Interest rates have dropped (or may be poised to rise).
- After improving their credit, the owner can get a better choice of auto rates and terms now.
Benefits of Refinancing Your Car
Better interest rates
Today's interest rates may be better than they were when the consumer first purchased the vehicle, although rates have risen slightly over 2014. Rates vary dramatically by term and the consumer's credit rating, but the current 36-month APR is as low as 1.85 percent on a $20,000 loan (770 credit score), 1.90 percent on a 48-month $18,115 loan (730 credit score) and 1.99 percent on a 60-month, $15,000 loan (724 credit score). Those with fair credit scores (640-699) can find 60-month, $25,000 loans at 4.36 percent.
For those who purchased their vehicles at rates higher than 6 percent, refinancing begins to look like a slam dunk for savings over the life of the payments. In most cases, the shorter the term, dealer-sourced financing often profits the sales staff while locking distressed buyers into rates higher than those offered by commercial lenders. The listing of sample rates by credit scores above also makes it obvious to owners who purchased their cars with less-than-good credit that it's worth looking into refinancing if their scores have improved. Use LendingTree's Auto Refinance Calculator to examine potential savings.
Car refinancing savings can add up
Even a thousand dollar savings over the term of a loan can make a worthy difference. In a scenario where a buyer took possession of their new $25,000 car on a five-year loan at the time when rates were as high as 7.75 percent, refinancing the car down to a 4.75 percent rate for the balance of the four years would save them nearly $30 per month. Shortening the term alone will save consumers on interest charges. For individuals who have not significantly improved their credit scores, finding co-signers to a refinancing loan is an option.
The cost of refinancing should not be prohibitive. State licensing and lien holder fees shouldn't tally more than $100 and car appraisals are not required. To calculate potential savings, it's necessary to obtain a free credit score to see where you stand.
There may be barriers to refinancing, including an advancing age and decreased value on the vehicle or the amount of the total balance that is being refinanced. Consumers must be certain there are no prepayment penalties on the original loan that could slash into any possible savings through refinancing before taking a new loan.
Note: Another reason for financing is when a car lease is expiring and the driver wants to execute the purchase option.