Why You Should
Consider Refinancing Your Car Loan
your auto financing plan isn’t working for you, you aren’t stuck with it. After
working with the same loan for a year or two, it might be time for you to
consider refinancing. The process of refinancing involves applying for a new
loan to cover the current loan, and still using the vehicle as collateral.
Refinancing is a fantastic option to consider if your financial situation has
changed since you first started financing your vehicle, you want to reduce or
lengthen the loan term, or you want to lower your interest rate in order to pay
less interest in the long run.
in mind that refinancing doesn’t always reduce your monthly payment; for
example, refinancing for a loan term of three years instead of five will
increase your monthly payment. So how do you know if financing is a good idea
for you? Here are four reasons why you should investigate the process of
refinancing your auto loan.
Lower Your Interest Rate
you make timely payments and your credit score has increased since you first
applied for the loan, you can benefit from refinancing by getting a lower
interest rate. It is normal in the loan market for interest rates to be higher
for those who have lower credit scores or challenged credit histories. The
American borrower’s average credit score is 697, which falls in the
Fair ranking. Nerd Wallet reports that a borrower with that credit score would
qualify for an average auto loan interest rate of 5.5% on a used vehicle.
more you can increase your credit score, the more progress you make on
qualifying for a lower interest rate. Seeing as interest easily adds hundreds
or thousands of dollars to the cost of the car, you want to lower the overall
interest rate as much as possible. Although you may not think that affects you
too badly, as everything gets factored into your payment each month, that still
ends up being money that doesn’t go directly into your car.
good credit is the easiest way to decrease your interest rate and save money in
the long run. Even if you start out with a longer loan term and a higher
interest rate, you can make those changes after paying off some of your
vehicle. However, keep in mind that refinancing too early is rarely successful,
or there is a very low chance you will end up with a lower interest rate. In
addition, plan to see your credit score dip slightly during the refinancing
process, as that is the effect of the inquiries made to investigate
Change the Loan Term
average auto loan term is more than five years. This can be good for borrowers
who have a tight budget and want to minimize monthly payments. However, longer
loan terms almost always have much higher interest rates as a part of the
financing plan. (Think of it as a trade off). If you are able to afford
slightly higher monthly payments, avoid longer loan terms. Use a loan calculator to figure out how much
you’ll be paying in interest vs. how much you might be saving on a slightly
larger payment that fits into your budget. Will it make a big enough difference
to be a worthwhile move?
addition to budgeting, think about the value of your car and how much you’re
paying interest on an asset that gradually depreciates. A car is worth 10 percent
less as soon as you drive it off the dealership’s lot. A vehicle is a great
asset to have, but the value of the car itself will decrease as time goes on.
If you can afford the payments on a shorter loan, why should you pay more
interest on your investment that decreases in value?
will give you the opportunity to reduce your loan term if you have more room in
your budget for a larger monthly payment, but you can also do the opposite.
Extending the loan term will reduce your monthly payment, which is useful for
if you are going back to school, expecting a child, or need to stretch your
budget for all the other important things in your life. Extending or reducing a
loan term is all about prioritizing not just the auto loan, but all the other payments
you need to make in order to keep everything running smoothly.
Make the Loan Fit in With
Your Other Finances
that changing the loan term is in your best interest if you’re having trouble
making payments or anticipate needing to free up room in your budget in the
near future. It’s best to refinance and make your loan work better for your
needs than not be able to make minimum payments or miss them entirely. Missed
payments stay on your credit report for several years and are one of the key
factors that determine your credit score.
many investments, the key is deciding how to best allocate your funds and what
other value you can get out of maintaining an investment or financial relationship.
In the case of a vehicle and auto loan, it isn’t in your best interest to sign
up for a loan that sounds good but will make you miss payments; and this is
becoming more and more commonplace. Across the country,
Americans are making risky investments that eventually overwhelm them with
Thinking About Your Future
the long run, your goal regarding your auto loan should be to pay the vehicle
off as quickly and painlessly as possible. Once you pay off the loan, the car
is your property, and that is extremely empowering in terms of being able to
claim it as one of your assets, even if the value is depreciating. In addition,
narrowing down and selecting a financing plan that has attainable goals will
help you reach even more financial milestones down the road.
more questions about auto loans or refinancing, don’t hesitate to reach out to Eden’s
professional Finance Team. And if buying a new vehicle is in future, check out
our extensive inventory of quality pre-owned