Interest Rates Are Lower Than Your Original Loan
If you find that interest rates are lower than your original loan, then it may make sense to refinance. When you refinance a car loan, however, it is considered a used car loan and because of this, the interest rates are normally higher than loans for new cars.However, depending on the market, the refinance rates could be lower than the interest rates on your original loan. If you can knock a couple of points off of the interest rate, it can make a huge difference by the time you get done paying off the balance. Think of it this way: if you had bought a new car before the credit crisis a decade ago, you may have paid at a higher interest rate. After the crisis kicked off, interest rates fell. You could have refinanced, more than likely, at a lower rate. This could have saved you a huge amount of money over the life of the loan.
Has Your Credit Score Improved?
Another reason you may want to refinance your car is that your credit score has improved drastically. A lender might give you a better rate if your credit history has improved since you signed the original loan. Because of this, your interest rate may drop, and this could make refinancing a real possibility. If your credit score is similar, or perhaps even worse, this obviously will not help you.
Did You Get the Best Possible Rate?
Car dealer financed loans quite often have a higher interest rate than a traditional lender can offer. If you have found yourself in this situation, it may pay to go to a bank in order to refinance your car. Obviously, this isn’t always the case, but take the time to do your homework and compare the rates you have and what your bank can offer.
Do You Need a Monthly Payment That Is Smaller?
If you need a smaller monthly payment, you may find that refinancing is a possibility.However, if you find yourself in a situation where this is the case, you probably have bigger financial problems overall. Refinancing your auto loan is probably just one of several steps that you will be taking to rectify your financial situation. This will more than likely extend the life of the loan and end up costing you more in the long run. However,sometimes situations present themselves that are difficult to work through and the one thing that you need is time. If this is the case, refinancing for a smaller monthly payment may make sense, even if it adds hundreds, if not thousands, to the loan.
Is your Lease Expiring?
Sometimes people lease a car to the full-term and find that they want to own the vehicle afterwards. At this point, you will need additional financing, allowing you to buy out the remaining cost of the vehicle. Quite often, people will go ahead and flip the lease, but for those who truly love their vehicle, refinancing their car loan could be an option.
How Far into the Loan Are You?
Car loans are paid by amortization, meaning that the first half of the loan pays more interest than the last half. In other words, you save much more money by refinancing early, rather than late. With a lower interest rate early in the loan, you can save a significant amount of money, unlike towards the back end. If you are reasonably deep into the loan, you shouldn’t bother with these refinancing options as you are already making more progress now than you were in the previous year.
Refinancing an Automobile Isn’t Always a Wise Choice
Refinancing your car isn’t always the wisest of choices. If you are “upside down” in the loan, meaning you owe more than the car is worth, you will be hard-pressed to find a lender to give you money anyway. If they did, however, it would only exacerbate the situation under most circumstances. Beyond that, if you are far into the loan, the effectiveness of shrinking the interest rate will be less than it would be earlier in the loan period. Beyond that, keep in mind that some lenders will not refinance a car that is over a certain age, typically somewhere near seven years old.