Refinancing an auto loan is one of the best ways to save money without a ton of hassle. Auto loan refinances happen when you replace your current loan with a new loan that has updated terms. If you switch lenders to refinance, your current lender will be paid the remaining loan balance by your new lender, and then you’ll start making monthly payments to the new lender. While saving money is often the primary motivation behind why people choose to refinance, other motivations include reducing interest rates, lowering monthly payments, and removing cosigners from the loan.
While refinancing is usually the right way to reduce your car payments, there are situations in which you’ll want to avoid the process. How do you know when it’s the right time to refinance your car loan? Find out below.
When you SHOULD refinance:
- Interest rates across the market have dropped since you purchased your car.
- Your credit score has improved, even marginally, and you qualify for a lower interest rate.
- You are still in the first half of your loan repayment process.
If you’re able to secure a refinanced auto loan with a reduced interest rate, you can save big over the remaining term of your loan. Since you pay the bulk of your interest payments during the first half of the repayment process, refinancing during that time can save you the most money.
Here’s an example:
You have $20,000 left to pay off on your current loan with a 6% interest rate. If you still have 48 months left in your loan term, you’ll be paying $469.70 per month which equals $22,545.60 total. If you’re able to refinance with just a 2% drop in your interest rate, you’ll be paying $451.58 a month or $21,675.84 total. That’s $869.76 in savings between a 6% and 4% interest rate!
When you SHOULDN’T refinance:
- Your current loan carries a prepayment penalty that is more than what you would save by refinancing.
- The new terms greatly extend the length of the loan.
- Your vehicle is worth less than the loan balance.
- The age of your vehicle or amount of the loan balance disqualifies you from refinancing.
Normally refinancing is the best choice, but in these unique circumstances you’re better off sticking with your current loan. If your primary goal is lowering your monthly payments, you can do that by extending the length of the loan, but isn’t recommended as you’ll be paying more in interest overall.
If you’re in the market to save money on your car loan, then refinancing is the best way to do it. The process is much simpler than any type of home loan refinance, so don’t let the word scare you away. Whether your primary goal is to save money, reduce the interest rate, or lower your monthly payments, if your situation applies to any of the reasons why your should refinance, what are you waiting for?
Switch and save with an auto loan refinance from White Rose Credit Union. Find out how much you can save by refinancing here.
