Have the interest rates dropped since you landed your initial auto loan?
This should be a credible reason to consider an auto refinance, especially if your existing deal has only worsened your financial circumstances. While refinancing your auto loan at a lower rate may sound enticing, it isn’t always the right thing to do. Here’s everything you must keep in mind when it comes to auto refinancing your loan at a lower rate.
When Does It Make Sense?
An auto refinance only makes sense when:
- Your credit score has recently improved
- You’re not upside down on your loan
- You have at least two years remaining on your current loan
- Your car is not older than ten years
- Your existing interest rate is higher than what you would like it to be
The Million Dollar Question: Have the Rates Dropped?
If you financed the loan through a dealer, then they may likely have made some profit out of it, hence the high rates. However, if the rates have now dropped and you have a financial institution in mind, then refinancing may potentially help you save up a significant amount over the remaining life of your loan.
Has Your Credit Score Improved?
It may be possible that your existing interest rate resulted from your below-par credit score. If you have recovered from the blow, now may not be a bad time to use it to land an interest rate of your liking.
Do You Wish to Change Your Monthly Payments?
More often than not, a change in financial circumstances is the reason behind a car payment straining your budget. Again, this is also a credible reason to look into an auto refinance. However, make sure to refinance at a lower rate for the long term if you wish to keep your monthly payments down.
Remember, the more your vehicle loses its value, the higher you end up owing on loan than the car’s actual worth. While refinancing for a longer term may entice you, you should do the math for an accurate picture. A longer-term with a high-interest rate only means that you’ll end up paying more in interest.
Would You Like to Remove a Co-signer?
In many cases, auto refinance is also considered if the borrower wishes to remove a co-signer. This is mainly because, over time, people build a good credit history, which eliminates the need for a co-signer.
The Bottom Line
In conclusion, while there’s never a bad time to refinance your auto loan at a lower rate, it’s important to understand that it’s not always the right choice. However, if you have decided to take the plunge, make sure to do it once your income has increased or if you’re confident that your improved credit score will land you better terms. This way, perhaps you will be able to afford a higher monthly payment and refinance for a shorter repayment term, saving more money in overall interest.