When it comes to car loan refinancing, knowing when to do it (and asking the right questions) can be a bit tricky. Refinancing your car can save you a substantial amount of money, lower your payments, or both. Buying an automobile recently or having prepayment penalties on your current loan may make refinancing less attractive.
Refinancing your car loan when it’s time
A refinance might be necessary for a few circumstances, but before you do so, make sure you study your finances carefully and understand the new loan terms. Read on to learn when you should refinance your car.
You are paying an excessive interest rate:
When you have seen your interest rates drop since getting your car loan, or if you have improved your credit score, your refinancing options may make sense.
A dealership financed your current car loan:
The dealer may not provide you with the best possible rate. A refinance could save you thousands of dollars over the rest of the loan if you financed through a dealer, especially if interest rates were not negotiated.
Check out auto refinance rates at financial institutions with which you have a relationship if you’re shopping around for the best interest rate. In most cases, banks offer members discounts on auto loans.
The equity on your account is positive:
Depending on how much your vehicle is worth, you may get a better car loan refinancing rate. To determine your loan-to-value ratio, check with your current lender, divide your loan amount by the value of your car, then multiply your result by 100.
The current lender is a pain in the neck:
Refinancing is often driven by disliking the lending practices of one’s current lender. The rudeness of the customer service representative or the poor quality of the records can put the lender in a bad light. If you are dissatisfied with your current lender, refinancing may be a good idea.
Improved credit health:
Your car loan refinancing rate is determined by your credit score. When your credit score has improved since you bought the car, and you’ve kept up with your payments, you might be able to get a better interest rate, which could save you money compared to paying interest on a new loan.
To evaluate your creditworthiness, lenders may use your FICO® Auto Scores or base credit scores. In either case, having a good credit score can indicate to lenders that you are more likely to pay back your loan and will therefore receive a lower interest rate.