Refinancing a car loan can help you save money in the long run. But there are scenarios where refinancing a car may put you in more debt. Let’s take a look at the best time to refinance your car.
Opting for car refinance can be a major decision. While there are certainly benefits to refinancing, it is also necessary to evaluate the potential drawbacks. Before we take a look at the best time to refinance your car, let’s check out what car refinancing means.
Car refinancing simply involves paying off your existing car loan with a new loan. Depending on your circumstances, car refinancing may result in a reduced interest rate. It can almost help make your monthly payments more affordable or change the term of your loan.
Refinancing can be especially beneficial if your credit score has improved since the day you purchased the car and have made all of your payments on time. If, however, your credit score has dropped since you took out the original loan or you have missed a payment, refinancing may not be a good idea right now.
When is a good time to refinance my car?
There are several instances in which refinancing your car loan may be advantageous.
Perhaps you need a reduced monthly payment to make up for a restricted budget, or you need to save the entire cost of car finance. We’ll go through a few elements that can make Auto refinancing now worthwhile.
You are eligible for a lower-interest loan
Many car buyers never compare auto loan offers or shop around, which can be a costly error. If you fall into this category, you may drive off the lot with a bad rate only to find later that you might have received a far better rate from another lender. That’s a compelling case to refinance.
Additionally, if interest rates have fallen a few percentage points since the car was first financed, you may qualify for reduced rates as well. In this instance, you may be able to save money by refinancing your car.
Read: How to refinance your car loan
You wish to have a lower monthly payment.
Even those with clean credit records may be dissatisfied with the cost of their current monthly payments. You may discover that having pre-approved loan from a bank, credit union, or private lender allows you to secure a longer term loan (and hence a lower monthly payment).
We recommend you compare the terms and rates of a new loan to the terms and rates of your current loan to make the best decision. However, be wary of taking out a loan for longer periods. While it may save you money on your monthly payment, you will end up paying more interest in the long run.
Your car’s value has depreciated over the years
An “upside-down” loan occurs when a consumer owes more money on their car than it is worth. This can occur if you purchase a car with a little down payment and finance the remainder. Your car simply loses value over time, and you end up paying on a loan based on its value months or even years ago.
If your car loan is underwater, you won’t be able to refinance because the lender will take a loss on the collateral if you default. Making extra payments on the original loan or taking out a home equity or personal loan to pay off the vehicle is one method to avoid disaster.
You own an old car
You should refinance your car before it becomes too old to qualify. Lenders set their own criteria for how many miles and years a car has been on the road before it is eligible for refinancing.
Nationwide Bank, for example, will not refinance cars that are 20 years old or have 150,000 miles on the odometer. Bank of America will not refinance vehicles that are 10 years or older or have 125,000 miles or more.
Your credit score has improved
If your credit score has improved over the years, it might be a good idea to refinance your car. Increasing your credit to the next tier in the FICO Score range can result in significant savings. Consumer credit is divided into five categories by auto lenders: A, B, C, D, and F. Car loans for applicants belonging to D and F tier may only be available as subprime or bad credit loans:
Credit score and tiers
- 781–850 (Tier A)
- 661–780 (Tier B)
- 601–660 (Tier C)
- 501 – 600 (Tier D)
- 300 – 500 (Tier F)
Read: Refinancing your car loan with bad credit: All you need to know
You make either less or significantly more than you did previously.
There could be two major financial reasons for car refinancing:
- You make more money than you did when you purchased the automobile and want to pay it off sooner.
- You earn less than you used to and are unable to make your monthly payments.
Those with better financial circumstances may choose to refinance to shorten the loan term. This raises their monthly payments but reduces the overall amount of payments required to pay off the car.
Owners who have had a financial setback (such as a change or loss of income) can refinance their vehicles for a longer term. Refinancing your car in such scenarios can help lower their monthly payments.
Refinancing your loan to a lower interest rate with the same or a better interest rate will reduce the overall cost of loan.
Read: Can car refinancing help you save money?
How often can I refinance my car?
The quick and short answer is: you can refinance your car any number of times. However, it will only be possible if you can find a new lender to finance your car. Although there’s no legal limit to the number of times you can refinance your car, the lender you want to refinance with should agree.
Let’s face it, lenders offer car loans to make money. So if a lender finds out that you’ve already refinanced your car several times before, they may not be so inclined to issue a new loan. Have you been searching for a car insurance policy that meets your budget? Tap the banner below to obtain free car insurance quotes from the best car insurance companies in under 10 minutes!
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