Let’s face it, our lives are constantly changing. Maybe you just got a new job, or recently moved or have fallen on hard times. Whatever the reason, if you’re in a different financial place than you were when you bought your car, you might want to consider refinancing your car loan.
With interest rates remaining at near historic lows now is a good time to investigate your options. Getting new terms could save you money, advance your payoff date or both.
When does an auto loan refinance make sense?
Changes in your life or in the market might allow you to refinance at a reduced interest rate, which means lower interest cost throughout the life of the loan. Here are some reasons why refinancing might be right for you:
- Interest rates have shifted: Interest rates may have dropped since you purchased your car. Even a small decrease of 1 percent could mean big savings. For example, if you borrowed $25,000 on a 50-month loan term with 4.7 percent interest, and now you can secure a loan at 3.7 percent interest, that would save you about $135 per year.
- Your credit score has increased: If your credit score is higher than when you first bought your car, refinancing could be a smart choice. Just a minor increase in your score could substantially change how a lender assesses your default risk. In turn, this could result in the offer of a lower rate.
- You want to shorten the length of your loan: Refinancing to a shorter term will likely cause your monthly payments to increase but almost certainly lower your overall interest cost. If you have a long-term loan, such as a 72-month loan, and your income stream has increased since you purchased your vehicle, shortening the term may make sense.
What are the downsides to an auto loan refinance?
Refinancing carries few risks, but it’s not always the best choice. Take care to avoid these pitfalls:
- Prepayment penalties: Check to see whether your current loan includes a penalty for prepayment. In this case, refinancing could actually cost you more money.
- Origination fees: Are you charged a fee when you take out a new loan? If the amount of interest you’re saving by refinancing is less than the cost of originating a new loan, you’re not coming out ahead.
- Extended loan life: Avoid any car loan that will extend the life of your loan. While extending could reduce your monthly payments, it likely will cost you more interest over the long term.
Refinancing your auto loan can be a great way to save. But, refinancing isn’t right for all situations, so it’s good to review all your options carefully.
Learn more about the different types of auto loans available.