Refinancing your auto loan involves taking a new loan to replace an existing one. It is a valuable solution if you need financial flexibility.
To illustrate how this works, imagine that you have convinced a financier or lender to give you money. You will then use this money to pay off what remains of your existing loan. After, you will need to pay your new lender based on the terms you have agreed upon.
There are certain situations where you should strongly consider refinancing your auto loan. Let’s look at them.
Need to Change the Loan Terms
The most common reason to refinance an auto loan is to change the terms. You probably had no problem meeting payments when you originally signed up for the loan. However, your financial situation might have taken an unlikely turn since then.
If you are having difficulty with your monthly cash flow and need some reprieve, refinancing can help you. You can choose to extend your current loan terms for lower monthly payments.
Let’s say you have 40 months left in a 48-month loan. You can get a new lender to pay off the balance in exchange for paying them in 52 months. As you can imagine, the monthly payment would now be a lot lower.
It is important to note that your monthly payment can go down with a longer-term. However, expect the interest rate to go up. That would mean a higher total payment.
In other words, you will pay more for the same car.
You Have Improved Credit Scores
Your credit score plays a crucial part in terms of your loan. After years of hard work, you can reward yourself with lower interest rates and monthly payments through auto loan refinancing if you find yourself in a better position.
If you can raise your credit score by just 20 points, you can save a lot of money on interest paid if you refinance your auto loan.
Auto Loan Interest Rates Are Down
You could be seeing a pattern here. You want a refinance because something changed from when you bought the car. That could be internal or external. Regardless, something happened that can affect your loan.
You never know what will happen in the future, especially with things beyond your control. And interest rates are an excellent example of that.
There are plenty of factors that can affect the interest rate offered to you. Some of these factors are under your control, like your credit score. However, a lot of them are not.
Interest rates can go up or down. That is dependent on how well the economy is doing. You can monitor this to time a refinance. Once you see it going down, it would do you good to pull the trigger.
An example of this was when the Federal Reserve cut consumer loan rates by as much as 0.25% in March 2020. Interest rates going down is always a great time to get a refinance.
Even a tiny change in your interest rate can mean hundreds of dollars of savings on interest payments. That is especially true if you have many months left on your current loan.
You Did Not Get the Best Deal
First-time car buyers would generally not know what a good or bad deal is when they first signed up for an auto loan. This is especially true if you get your loan from the car dealership.
Once you learn what makes a good auto loan, you still have the option to refinance it. The biggest reason is to save money by trying to lower the interest rate.
Another reason many people do not get the best deal is they do not shop around for a loan. That is a mistake, as comparing different loans is crucial to get the best one for that moment.
Different dealers can have varying offers. Do your due diligence and research. Ask for quotes from at least three lenders to compare them. After that, read reviews about these companies on how the experience is for people. That will give you a good idea of who can give you the best possible deal.
Fortunately, you still have a way out of a bad deal by refinancing your loan.
Need to Remove a Co-signer
One of the essential things for lenders is their guarantee. They want to be sure that they will get paid no matter what. That is the nature of their entire business. So, if they find that your background is not enough, they may ask you to get a co-signer.
A co-signer is a person backing you up for the loan. It is someone having your back. Legally, they will be liable too if you default on your payment.
Once you are in a better financial position, you or your co-signer may want to be removed from the loan. Getting a refinance is one of the easiest ways to do this.
Your main reason to remove the co-signer is that you now have a better cash flow, credit score, and finances. On top of that, you may get a better overall deal. If so, your refinance may also include lower interest rates.
Refinancing your auto loan gives you the ability to be flexible. If you think you can save money on interest payments, you can refinance. If you need better monthly cash flow, this is a viable solution.
There are situations where this is not practical. For example, if you are almost at the end of the loan, it no longer makes sense to do a refinance. Or it could be that your car’s value is significantly lower already.
Spending time researching your next move can go a long way in helping you achieve your goals. Do the computations yourself or ask for expert advice. It is up to you to determine if this is a feasible solution to your problem.
Michael launched Wealth of Geeks to make personal finance fun. He has worked in personal finance for over 20 years, helping families reduce taxes, increase their income, and save for retirement. Michael is passionate about personal finance, side hustles, and all things geeky.