If you are looking to refinance your car loan, it is probably because of the lower monthly interest payment. However, it would help if you remembered that there is an opportunity cost involved here. Refinancing for lower interest payments will increase the loan term along with the total money paid in interest.
Here are six conditions where you might consider refinancing your car loan:
1. Refinancing Requirements
Most banks and lenders have their refinancing requirements. If you are actively seeking to refinance your car, ask for details from the bank. For instance, the bank of America lets you refinance if you have $7,500 or more remaining on your car loan – $8,000 if you are from Minnesota. Additionally, the car should not be more than ten years old and have less than 125,000 miles on it.
2. Prepayment Penalties
Some banks put a penalty on people paying off their car loans early. These penalties are called prepayment penalties. If you are annoyed with your lender making you pay such penalties, you can look towards refinancing your car. However, it is better to ensure that the amount you save by refinancing is greater than what you pay in penalties.
3. Interest Rates
You might think about refinancing your car is when the interest rates you qualify for today are much lower than the rate you are paying currently. If the interest rates at the current time are the same or higher than the previous rates, it is better to hold off refinancing.
4. Your Credit Score
Credit scores play a role in determining the rate of interest you pay on your car loan. If your credit score has improved since your car loan, it is better to refinance your car to obtain a lower interest rate.
5. Your Income
It is normal to experience ups and downs in your disposable income at the end of the month. If your income has reduced over time, then it makes sense to refinance your car to reduce the monthly payment. Alternatively, you can also create a monthly budget to know where your income is being spent.
6. Time Remaining on Your Loan
Extending your loan term because of refinancing the car loan can leave you with more money in the bank account at the end of every month, albeit at the expense of higher interest payments. This might be helpful for some people. On the flip side, some people would like to reduce the total amount of money they pay in loans by having a shorter-term loan with lower interest rates.
If you happen to fall in one of these camps, then it wise for you to consider refinancing now.