The Credit Traveler | Refinancing your car

If you’ve ever taken out an auto loan to pay for your car, refinancing could help you save money in the long run by means of a potentially lower interest rate. If you believe your financial situation has improved either by increasing income, inheritance, paid off other pre-existing loans or interest rates have dropped since you took out your last loan, this might save you thousands of dollars in the long run.

I’m going to dive deeper into each of these and then get into when/why you should consider refinancing giving you both sides of the picture.

When should you consider financing a car loan?

For this, you need to be conscious and aware of various factors that may have changed since you first financed the car. I’ll try to cover the various things that might have changed for your consideration.

1. Interest rates changes in your favor

These may have dropped since you initially took out your original auto loan.
Change occur regularly, so there’s a possibility that rates might’ve fallen since you took out your original auto loan. Even a drop of 2 or 3 percentage points may result in significant savings over the life of your loan.

2. Your financial situation improved

Improvement in your access to capital changes the way you can pay your loans. Now, you could be making more money than last time and hence afford to pay off not only faster but with a lower interest too.
Lenders can use a number of factors to decide your auto loan rate, including your credit score and debt-to-income (DTI) ratio, which is calculated by dividing your monthly income by your monthly debt payments.

As such, improving your credit health and decreasing your DTI ratio can lead to more favorable terms on your refinanced loan.

3. Initial offer was not as favorable

Even if interest rates haven’t dropped or your financial situation hasn’t improved significantly, it may be worth shopping around for better loan terms anyway. For example, you may have received a loan with an interest rate of 8% when other lenders were offering lower rates.

This may be especially prudent if you got your original loan from a car dealer, as dealers sometimes offer higher interest rates to make extra money.

Do keep in mind if you got a 0% APR payment scheme for 60 months towards a car, you will not be able to refinance your payments. This is so because dealers offer you that 0% interest rate by including the interest in the price of the car – they still make money off of you by tricking you into that 0% rate. If a deal is too good to be true, it probably isn’t- so don’t get tricked.

4. Unfavorable bills each month – inability to pay.

Even if you’re not able to secure a lower interest rate, it may still be worth trying to find a loan with a longer repayment period in order to reduce your monthly payments.

If you can’t find a suitable loan, you may also be able to renegotiate the repayment period on your current loan. However, keep in mind that more time spent paying back your loan is also more time spent paying interest. In general, you’ll pay more interest overall if you have a loan with a longer term. My recommendation is to take as short a loan repayment period as possible to ensure lowest rates – in your budget ofcourse.

But wait, Sometimes refinancing may not be the best option!

Sure, refinancing can save you money, but it’s not always the best option. You may want to hold off on refinancing if any of the following applies to you:

1. You’ve already paid off most of your original loan.

Interest is often front-loaded, meaning you pay more of it off in the beginning (down payment plus initial payments). The longer you wait to refinance, the less you may be able to save on interest.

2. Your car is old or has a significant amount of miles on it.

Cars depreciate quickly, so you’ll likely only be able to refinance within the first few years of owning your car. Some lenders, for example, will not refinance cars that are older than five years or have more than 75,000 miles on them.

3. Hidden fees can outweigh the benefits.

It’s important to look out for any fees associated with refinancing. For example, there may be prepayment penalties for paying off your original loan earlier than planned with your refinance loan. You may have to pay some additional interest in addition to the principal.

Even worse, some loans, such as loans with precomputed interest, make you pay all of the interest in addition to the principal.

You’re also likely to incur refinance fees. These can include lien holder and state re-registration fees, which don’t usually cost more than $85 combined. While they’re not enormously expensive, it might be a good idea to see if you can afford these fees before you refinance.

Additionally total all the fees and compare them with the savings. If the difference is negative or close to zero, then really it’s not worth the time or effort.

4. You’re looking to apply for more credit in the near future.

Refinancing could negatively impact your credit. If you’re considering applying for a mortgage or that really exclusive credit card you’ve had your eye on, you may want to hold off on refinancing to keep your score as high as possible and maintain your chances of being approved.

Always keep in mind!

Refinancing can save you money, but you should only consider it when the circumstances are right.

If interest rates are lower or your financial situation has improved, it may be worth shopping around for a loan with better terms. But make sure you don’t wait too long, or the benefits of an auto refinance loan may not be worth it.

Additionally, make sure your credit score is stronger than before so don’t go opening multiple lines of credit 6 months before you refinance. 750+ scores with good history tend to get improved refinanced rates and always, ALWAYS, shop around before you commit.