If you own a car and you’re looking for ways to put some money back in your pocket, a refinance car loan could help you lower your monthly payments and free up some cash.
The best time to consider refinancing your car loan is when you’re in a financial position to be approved for better loan terms. For example, refinancing could let you change the length of your loan and improve your interest rate, or it could give you a chance to partner with a new lender. Read on to learn more.
Your credit score is up
If your credit score has risen significantly since your original loan, say from good to excellent, now might be the right time to see if you can negotiate better loan terms.
Raising your credit score takes time, but doing so could help you get better terms when you’re ready to refinance. You can help your credit score by consistently paying your bills on time, keeping your credit card balances low, keeping older accounts open and in good standing, not applying for too many new credit accounts and having a good mix of installment and revolving loans.
You’ve proven yourself to be a trustworthy borrower
Paying what you owe on time every month doesn’t just affect your credit score — it also determines your standing with your car lender. If you’re looking to refinance, you want to make sure to put yourself in the best possible position. You can do this primarily by paying your bills on time and in full. A history of late or missed payments could damage your chances of negotiating better terms than your original loan.
You could benefit financially from a new loan
Before you contact your lender to discuss a refinance, make sure you have an idea of what kind of terms would benefit your finances. If interest rates have gone down since your original loan, you could secure a more favorable rate. Lower interest could help you save money.
Lower monthly payments could also save you money, especially in the short term. Just as lowering your interest rate can lower your payments, so can extending the length of the loan term. Just keep in mind that if you extend the length of your loan term, you could potentially owe more in interest over the life of the loan, even if the interest rate has dropped.
To calculate the total cost of your loan, carefully examine the annual percentage rate (APR), which includes fees and other costs in addition to the interest.
When you shouldn’t consider refinancing a car loan
If you’re unsure about whether it’s the right time to refinance, here are some situations when it might not be a good idea:
- Your loan is almost paid off: If you don’t have that many payments left on your original loan, it may not make sense to refinance. Most lenders have a minimum loan term of 24 months, meaning if your loan term is shorter than that, you may not qualify.
- You have a pre-payment penalty: Refinancing your loan means taking out a new loan to pay the old loan off. However, some lenders penalize borrowers for paying off their loans early, which is what happens when you refinance. If your current auto loan has a large prepayment penalty, refinancing might not save you any money.
- Your car isn’t worth much: If your car is worth less than the amount of your loan, it’s unlikely a lender would approve you for a refinance. This is known as being “upside down” on your loan or having negative equity in your vehicle.
- You haven’t had your existing loan for long enough: Most lenders prefer you to have your loan for at least six months before they consider a refinance so they can make sure you’re paying back the money on time.
Explore a car refinance when the time is right
Refinancing a car loan could affect your finances now and in the future. There are numerous benefits to refinancing, including a lower interest rate, lower monthly payments and hopefully saving more money over time. However, you want to make sure the new terms benefit you and don’t add more strain on your finances.
It’s a good idea to shop around at other banks, credit unions or online lenders that may offer more desirable loan terms, particularly if your original loan came from a car dealership.
Carefully consider what you could get out of a refinance, confirm the new terms are a better match for your goals and make the most of putting yourself in a more secure financial position.
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