Your auto loan is likely to be your biggest monthly payment other than your mortgage or rent payment. Because of this, you should make sure you have the best possible loan terms for your financial situation. Decreasing your interest rate by just one percentage point can save you a thousand dollars, or more, as you repay the auto loan. In many cases, refinancing is a simple process that is well worth your while.
When to refinance an auto loan
Decrease in market interest rates: If interest rates on auto loans, in general, have gone down since you took out your loan, refinancing can be a wise choice for you. You can lock in today's lower interest rate and stop paying the higher rate you had agreed to when you initially bought your car.
Increased credit score: Borrowing money is tough when you have a low credit score. If you manage to qualify, lenders will charge you higher interest rates on credit cards, mortgages, and auto loans. If you got your auto loan several years ago when your credit score was low but you have been making all the payments on time, you may be surprised to learn how much your score has improved. You can use your new and improved credit score to qualify for lower interest rates on a refinanced auto loan.
Barely making payments: Refinancing can sometimes be a good idea if your financial situation has deteriorated since you bought the car. If you find you are barely making the monthly payments, refinancing with a longer loan term can decrease the monthly payment amount. This gives you some wiggle room in your budget to help you stay on track with making each payment on time and protecting your credit score. However, be aware that a longer loan term typically means you will pay more in total interest over the life of the loan.
Lease purchase conversion: Many leases have the option to convert to purchase agreements when the lease expires. However, the terms on these loans may not be the best, especially because you got your lease several years ago. It may pay to refinance the amount you need to borrow to purchase your car after the lease expires.
Tips for a smooth auto loan refinance
You should always check to make sure your current auto loan does not have a prepayment penalty. If it does, you will only want to refinance if you are going to save more money than you pay in the penalty. Even worse than a prepayment penalty is a precomputed loan, where you are obligated to pay the full interest amount even if you pay off the loan early. In this situation, you will never save money by refinancing.
Once you have decided you are going to refinance, start by shopping for interest rates. Mainstreet offers competitive rates and 24/7 online application via our website at mainstreetcu.org. Don't forget to also call your current lender to ask if they can lower your interest rate.
When you are ready to refinance with a particular lender, make sure you understand all the terms of your loan agreement. You should know what your monthly payment amount is, what day of the month it is due, how to make your payment, and when your auto loan will be completely paid off. Once you are comfortable with all of those details, it is time to sign the paperwork and finish the process of refinancing your auto loan.