Wondering if auto refinancing is a good option to get out of your costly car loan payments? Let’s tell you if it is good to refinance your car!
Things don’t look good for the auto industry in general – the prices of new and used cars are skyrocketing, and so are the average car loan payments! If you’re running short of money before the end of the month, it’s best to look at options to save. If you have a great credit profile, refinancing your car should be at the top of your list.
If you’ve caught yourself thinking “Is it good to refinance my car?”, then this post is for you.
Is it good to refinance your car?
Refinancing is one of the best options you have to save money – provided you do it the right way. Everything that involves money also has caveats, and so does refinancing. When done with a good credit profile, a good lender, and at the right time, refinancing can be the best thing you’ve done since buying a car.
However, if you rush to refinance under the impression that it will save you money anyway, you’re wrong. You should ideally meet certain criteria before refinancing, as we’ve mentioned below.
When should you refinance your car?
If interest rates have dropped
Banks and financial institutions set auto interest rates based on those set by the Federal Reserve. If the Fed has reduced rates recently, it’s possible that you can get a lower rate to refinance your car. Reducing your APR by even a couple of points can save you hundreds every year.
If your credit score or debt-to-income ratio has improved
Your credit score might’ve been poor when you first financed your loan, which means you were offered a high APR. But if your credit profile has improved since then or you’ve reduced the number of loans taken by you, you can refinance to score a lower APR and save more money.
You feel shortchanged by your first loan
It’s also possible that despite having a great credit score, you were not given the APR you deserved. This is common at dealerships and credit unions, which try to lock you into the first offer you get. Not only do they give you fewer choices, but they also make use of your FOMO (fear of missing out) by telling you that it’s the best deal you can get.
With car refinancing, you can shop around, compare offers from several lenders, and get the APR you deserve for your credit score.
You have trouble managing monthly finances
A problem most car owners face is that they end up overestimating their ability to repay the car loan. This could lead to cash flow issues – especially if you’re running a household with school- or college-going kids. If you find your wallet drying up before the month’s end, you can refinance your car to save some money every month.
Pros and cons of refinancing a car
Benefits
1. Lower monthly payments
With an excellent credit score, borrowers can save between $800-1500 every year on an auto loan. Even with a moderate-to-fair credit score, you’ll be able to cut your monthly payment by a significant amount. This money can then be used to cover other household expenses, repay student debt, or even gas.
2. Paying less in interest
When repaying a loan, the most effort goes into repaying interest charges, not the principal. Interest charges accumulate much faster if you have a higher APR. It is good to refinance a car if you’re looking to pay fewer interest charges and close the loan as soon as possible.
3. Pay off your current loan earlier
Let’s say that you are expecting to take on a new loan in the next couple of years. It would be much easier if you closed your current auto loan before that since it will improve your credit score and help you have some disposable income. You can refinance your car to get a shorter term as long as you’re okay with higher payments.
4. Tap into your car’s equity
If you expect to run into a financial crunch sometime soon, refinancing can help you there as well. With cash-out refinancing, you can use the equity you own in the car to borrow up to 125% of the car’s resale value. However, you must not be “underwater” or “upside-down” on the loan (which means you owe more than what the car is currently worth).
Disadvantages
1. More interest charges with a longer term
One way to reduce your monthly payment is to refinance your car loan to a longer term. However, with each passing month, the interest charges continue to pile up and you could end up paying more than the loan amount in the long run.
2. Prepayment penalty and fees
Some lenders also have prepayment penalties for closing a loan before the end date. This is because lenders make money through the interest charged on principal – which they will lose if you close the loan early. Auto lenders can charge up to 2% of the remaining loan balance.
3. You could end up upside down
If your priority is just to save money every month but don’t mind extending your loan term, there’s always the danger of going underwater on the loan. In such a case, you could end up paying more than the car’s worth in the long run.
When should you hold off on refinancing?
1. If the fees outweigh the benefits
If the prepayment penalties and other fees cost so much that it takes a big chunk out of your finances, then you should hold off on refinancing.
2. If your car is more than a few years old
Most lenders will not refinance vehicles older than 10 years old.
3. If you’ve almost paid off the loan
It doesn’t make sense to refinance your car if you have less than a year left on the loan. It’s best to “drive-through” and complete paying off the loan in the remaining term.
4. If you want to take out a loan in the near future
Having too many open loans can affect your credit score, besides making it hard to take on new loans. You can refinance your car loan to a shorter term so that you get to pay it off before the next loan.
How to evaluate if refinancing your car is a good idea
Identify your financial goal
Before refinancing, ask yourself – what is your financial goal?
Do you want a lower APR to save on interest? Or would you rather risk more interest in the long term and extend your loan term? Or do you want to keep your current loan term and just lower your monthly payment? It’ll be easier to decide if refinancing is right for you if the final goal is clear.
Calculate your savings using an auto loan refinance calculator
Before refinancing, it’s best to calculate your estimated savings with a new APR. An auto loan refinance calculator can quickly help you make a decision on whether refinancing is a good idea.
Compare multiple offers and rates before finalizing
Don’t make the same mistake you did the last time – shop around for better offers
Tips when refinancing your car loan
- Try to build up your credit score well before applying. According to FICO and VantageScore, a score above 660 is considered ‘good’ and can get better rates.
- You can pre-qualify with multiple lenders using refinance platforms like Way.com. Not only can you get a range of options, but you’ll also be able to choose the offer that fits your budget best.
- If you think that you have bad credit, try getting a close friend, parent, or sibling to co-sign when refinancing.
- You can also choose lenders that specialize in bad credit if you are desperate and want to refinance as soon as possible.
Frequently Asked Questions (FAQ)
What is a good reason to refinance a car?
The most common reason to refinance a car is usually to lower one’s car loan monthly payment. With increasing vehicle costs, more people are looking to save on expenses every month. Refinancing can help you get a lower APR, which along with a change in loan term can result in a more affordable car payment. Apart from this, you can also refinance to add a co-signer or co-borrower, which can help you pay off the loan quickly.
Is refinancing a car worth it?
Yes, refinancing a car is worth it – but only if you do it right! Most people refinance to reduce their APR and save on interest charges over the course of the loan. However, some borrowers may refinance to extend their loan term – which means you end up paying more in interest! Therefore, analyze the reasons for
Is it bad to refinance your car?
Refinancing can have bad outcomes if you do so without researching or for the wrong reasons. For example, extending your loan term without lowering the APR can increase your interest charges over the course of the loan. Ideally, refinancing with a higher credit will always have a great outcome for you.
What happens after you refinance your car?
During the refinancing process, your new lender will pay off the remaining loan balance with the current lender. This will close the old loan and leave you free to start paying lower monthly payments on the new loan. This may be either because the new lender gave you a lower APR, or because you extended your loan term. With an excellent credit score, you can save up to $1500 every year.
Here’s more info on top-rated airport parking, the best parking spots in your city, the most affordable auto insurance for your car, easy auto refinance, and top-rated car washes near you.
