There are two main reasons why people refinance auto loans: 1) To lower the interest rate they are paying and 2) to reduce their monthly payment. You may be able to do both when you refinance, and save hundreds or thousands of dollars in the process.
As you look into refinancing, keep in mind that lenders may have minimum standards they require. For example, your remaining balance on your current loan may have to be at least $7,500 and your current mileage may not be more than 75,000 miles. Since each lender has its own standards, don’t be discouraged if the first lender you talk with can’t help you. Do, however, be sure to ask about minimum requirements before you apply so you don’t waste time applying for loans you can’t get.
If you want a lower interest rate…
The new interest rate you’ll get is based at least in part on your credit score, so check your credit score online before you apply. You can pull your full credit report at AnnualCreditReport.com or try our free Credit Report Card for a monthly credit score update. Keep in mind the score the lender requests and the one you view may be different since there are many different credit score models available.
Even if your credit scores haven’t changed since you got the loan, you may still find that you can get a better rate. This is especially true if you obtained your financing through the dealer, since dealers may “mark up” loans to a higher interest rate in order to make more money for themselves.
If you want a lower monthly payment…
Aside from reducing your interest rate, an auto loan refinance can reduce your monthly payment. This may extend your loan term, or the number of months you have to repay the loan, though. That’s not ideal because you may pay a lot more in the long run. Since car values depreciate so much, you may find you owe money on a vehicle that’s not worth that much anymore. But there’s an easy way to solve that problem; pay more on your loan each month to pay it off faster.
Refinancing a vehicle loan can be a good option if you can free up some cash and alleviate a financial burden. Just be sure to weigh the pros and cons, including the costs involved in refinancing.
Image: iStockphoto
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