When Is It a Good Idea to Refinance a Car Loan?

Do you know that you have the option to refinance auto loan? That allows you to be more flexible with your money when needed.

Refinancing may involve a new lender paying off your current loan, leaving you to pay them instead. Still, refinancing your loan mostly means renewing your current deal. It doesn’t necessarily have to be with a new lender. The current one could offer to refinance internally.

You might want to consider refinancing your auto loan to get longer payment terms. The interest may be the same, but the monthly payments are lower. Of course, this can also increase your overall interest payment.

The main question is when to refinance your auto loan.

You Have Better Financials Now

Your original loan’s terms are based on your financial situation when you made the deal. Say you find yourself improved in terms of cash flow and credit score a few years later, you may want to consider refinancing.

The main factor would be your debt-to-income ratio, calculated based on your income and monthly payments. If you show a higher income now, the ratio improves. This allows you to get better loan deals.

When you have more money coming in, you get the opportunity to decrease your interest and get better loan terms.

Interest Rates Have Dropped

Another situation is where interest rates drop a few years after you take the original loan. It all depends on your original loan, how much the interest is, and how much is left to pay.

The trick is computing the total amount you would still pay with the original loan compared to the new loan, taking into account how much you have already paid. By doing this, you can easily find which one is the better deal moving forward.

You Never Had a Good Deal

It is common for people to get the first loan deal offered. But that doesn’t mean you have to be stuck with a terrible deal forever.

As mentioned earlier, you can apply for an auto loan refinancing if you find yourself in a better financial situation—or stumble upon a lender offering a better deal.

This situation mostly happens when the original loan was from a car dealer, whose higher interest rates will typically tempt you to refinance your auto loan.

Having Trouble With Monthly Bills

Probably the most important aspect of getting a refinance of your auto loan is to help with the monthly bills. If you find yourself having a difficult time making ends meet, consider this a way to give yourself some breathing room.

An extended loan period can give you lower monthly payments to help with your struggle. That can be an alternative rather than having to sell your car.

On the other hand, there are also situations where you would not want to get an auto loan to refinance.

You Are Almost Done

If you have a year left on a five-year loan, there is no sense in getting an auto loan to refinance. Even with lower interest rates, you would most likely end up not saving a lot or even paying more money.

The Cons Outweigh the Benefits

Remember, you will have to go through a process with the lender whenever you get a loan. You should expect to pay fees.

For example, your original lender could have a clause about the prepayment of loans. That means you have to pay a certain amount for completing the loan ahead of schedule.

Worse, there are loan deals stipulating that you pay precomputed interest rates when you pay off the loan early. That means you still pay for everything and don’t benefit in any way.

If You Are Looking to Get Other Loans

If you foresee yourself applying for another loan, a refinance can hurt your credit score. It would be best to hold off until you get the new one before going on a refinance.

Every situation is different. In some instances, refinancing is the best route to go; sometimes, it is not. The important thing to do here is research and determine what you need before applying for a refinance of your auto loan.