Why You Should Consider Refinancing Your Car Loan

 

If your auto financing plan isn’t working for you, you aren’t stuck with it. After working with the same loan for a year or two, it might be time for you to consider refinancing. The process of refinancing involves applying for a new loan to cover the current loan, and still using the vehicle as collateral. Refinancing is a fantastic option to consider if your financial situation has changed since you first started financing your vehicle, you want to reduce or lengthen the loan term, or you want to lower your interest rate in order to pay less interest in the long run.

 

Keep in mind that refinancing doesn’t always reduce your monthly payment; for example, refinancing for a loan term of three years instead of five will increase your monthly payment. So how do you know if financing is a good idea for you? Here are four reasons why you should investigate the process of refinancing your auto loan.

Lower Your Interest Rate

If you make timely payments and your credit score has increased since you first applied for the loan, you can benefit from refinancing by getting a lower interest rate. It is normal in the loan market for interest rates to be higher for those who have lower credit scores or challenged credit histories. The American borrower’s average credit score is 697, which falls in the Fair ranking. Nerd Wallet reports that a borrower with that credit score would qualify for an average auto loan interest rate of 5.5% on a used vehicle.

 

The more you can increase your credit score, the more progress you make on qualifying for a lower interest rate. Seeing as interest easily adds hundreds or thousands of dollars to the cost of the car, you want to lower the overall interest rate as much as possible. Although you may not think that affects you too badly, as everything gets factored into your payment each month, that still ends up being money that doesn’t go directly into your car.

 

Maintaining good credit is the easiest way to decrease your interest rate and save money in the long run. Even if you start out with a longer loan term and a higher interest rate, you can make those changes after paying off some of your vehicle. However, keep in mind that refinancing too early is rarely successful, or there is a very low chance you will end up with a lower interest rate. In addition, plan to see your credit score dip slightly during the refinancing process, as that is the effect of the inquiries made to investigate refinancing.

Change the Loan Term

The average auto loan term is more than five years. This can be good for borrowers who have a tight budget and want to minimize monthly payments. However, longer loan terms almost always have much higher interest rates as a part of the financing plan. (Think of it as a trade off). If you are able to afford slightly higher monthly payments, avoid longer loan terms. Use a loan calculator to figure out how much you’ll be paying in interest vs. how much you might be saving on a slightly larger payment that fits into your budget. Will it make a big enough difference to be a worthwhile move?

 

In addition to budgeting, think about the value of your car and how much you’re paying interest on an asset that gradually depreciates. A car is worth 10 percent less as soon as you drive it off the dealership’s lot. A vehicle is a great asset to have, but the value of the car itself will decrease as time goes on. If you can afford the payments on a shorter loan, why should you pay more interest on your investment that decreases in value?

 

Refinancing will give you the opportunity to reduce your loan term if you have more room in your budget for a larger monthly payment, but you can also do the opposite. Extending the loan term will reduce your monthly payment, which is useful for if you are going back to school, expecting a child, or need to stretch your budget for all the other important things in your life. Extending or reducing a loan term is all about prioritizing not just the auto loan, but all the other payments you need to make in order to keep everything running smoothly.

Make the Loan Fit in With Your Other Finances

Remember that changing the loan term is in your best interest if you’re having trouble making payments or anticipate needing to free up room in your budget in the near future. It’s best to refinance and make your loan work better for your needs than not be able to make minimum payments or miss them entirely. Missed payments stay on your credit report for several years and are one of the key factors that determine your credit score.

 

Like many investments, the key is deciding how to best allocate your funds and what other value you can get out of maintaining an investment or financial relationship. In the case of a vehicle and auto loan, it isn’t in your best interest to sign up for a loan that sounds good but will make you miss payments; and this is becoming more and more commonplace. Across the country, Americans are making risky investments that eventually overwhelm them with debt.

Thinking About Your Future

In the long run, your goal regarding your auto loan should be to pay the vehicle off as quickly and painlessly as possible. Once you pay off the loan, the car is your property, and that is extremely empowering in terms of being able to claim it as one of your assets, even if the value is depreciating. In addition, narrowing down and selecting a financing plan that has attainable goals will help you reach even more financial milestones down the road.

 

For more questions about auto loans or refinancing, don’t hesitate to reach out to Eden’s professional Finance Team. And if buying a new vehicle is in future, check out our extensive inventory of quality pre-owned vehicles.