Do you love your vehicle but not your monthly payments? If you purchased your car or truck when interest rates were high or want to change the length of your loan term, it’s time to explore whether refinancing your auto loan makes sense. Refinancing can lower your interest rate, which reduces the amount you pay each month as well as saves you money over the life of the loan. In this blog, we will discuss the benefits, timing and risks of auto loan refinancing so you can love your new loan as much as your new car.
What Is Auto Loan Refinancing?
Auto loan refinancing is when you take the remaining balance of your auto loan and refinance that loan into another auto loan through a financial institution or some other lender. This can allow vehicle owners to change their loan term (increase or decrease it) and/or to lower their current interest rate. In most cases, you will be able to refinance your auto loan at the same lender if your account is in good standing. Alternatively, you can refinance at a different lender and your loan will be moved there.
To ensure you will get the best interest rate available to you at any lender, check your credit score before you apply. If you have an older vehicle and a lower credit score, you run the risk of not being approved for a loan. Visit annualcreditreport.com for a free yearly credit report from each of the three U.S. credit bureaus.
Another tip is to check your car’s current value and compare it with the remaining balance on your auto loan. If you owe more on the car than the listed value, it may be harder to refinance your loan.
When Is the Right Time to Refinance?
Determining the right time to refinance will depend on several factors, according to Bankrate.com. The first is if you are financially ready to qualify for an auto loan. Along with good credit, you will need to document a steady income to be approved for a refinance. The next factor is rates. Have they dropped enough from your current rate to significantly lower your payments? Are rates predicted to increase or decrease in the next six months? Understanding the rate market is another factor that could make you act now or wait a few months for better opportunities.
What Are the Benefits and Risks?
One of the biggest benefits of refinancing your auto loan is reducing your monthly payment. This is done by getting a loan with a lower interest rate than your current loan. Another benefit of refinancing is to extend or shorten your loan term. Extending your loan term can also lower your payments. Shortening your term lets you pay off your auto loan faster. If you are moving to another state or across the country, refinancing will also let you keep your loan with a lender closer to your new home.
One of the bigger risks of refinancing is that if you extended your loan term, you will be paying interest longer than your original loan. Also, be sure you are aware of any prepayment penalties on your new loan if you pay off your vehicle sooner.
Refinancing your auto loan can have a positive impact on your financial life. Be sure you understand all the benefits and risks and are financially ready to qualify for a loan. Shop lenders to find the best rate for yourself. Remember to check if there are any rate discounts for automatic payments, which could save you more money.
How TCU Can Help
Travis Credit Union is your partner throughout your financial life. Whether you are looking to buy or refinance a vehicle, TCU offers competitive rates, 90 days no payment, an easy online application, discounts for automatic payments and more. Visit our vehicle loan page to get started.
Why wait? You can use our free pre-qualification tool to see if you already have an auto loan waiting for you without affecting your credit score. If you need to save for a down payment, our money market accounts and certificate accounts let you save with a purpose while earning dividends which grow your money faster.