What Is Auto Loan Refinancing?

A car loan can last for multiple years with monthly payments that come with it. You’re essentially replacing a previous loan you took out with a new one, which might have a lower rate of interest or another feature that makes the refinancing decision sensible.

Where You Should Refinance

If interest rates have come down since the time you obtained your car loan, auto loan refinancing may be a smart decision for your situation. This is because a two or three percent decrease in the interest rate can save you thousands of dollars over the life of your loan, especially if you’ve taken out the loan recently.

Also, a lot of people opt for auto loan refinancing when their monthly disposable income goes up. A higher income reduces your chances of defaulting on the loan. It increases lender confidence in the loan agreement, letting you avail lower interest rates. On the other hand, you can also avail refinancing with your current lender or a new lender to improve your situation if you’re experiencing a rough patch with low cash flows. However, this may mean that you have to pay more interest over the loan term.

Where You Should Not Refinance

There are some situations where refinancing a car loan can affect your credit scores negatively. Situations when you should stay away from loan refinancing include taking out new credit cards or finding a new mortgage in the future.

Other times, refinancing may lead to penalties from your current lender. One such example is the prepayment penalties that lenders impose when you pay off loans early. Consider the cost and benefits of taking out a new loan before making your final decision.

Tips for Refinancing

The refinancing process is complicated, but the bottom line you should never forget is the money you save from the whole process. Other things to bear in mind are:

  • The credit rating you currently have
  • The model year of your car
  • Car condition
  • The miles you have put on the car.

Lastly, the money you have already paid on your current loan determines if auto loan refinancing is a sensible option or not. If most payments have been taken care of, it is better not to go for refinancing since most loan agreements are front-loaded.