Does it makes sense to refinance your car loan?
If you’re looking to reduce the amount of money you pay out each month paying bills, consider refinancing your vehicle loan. Refinancing your loan can lead to a lower monthly payment, a shorter term or both. It depends on a wide range of factors, including the value of your vehicle, how much you owe on your current loan and your credit rating. Please note: If you owe more on your car than the vehicle is worth, you may not be able to refinance your loan.
If any of the following factors have changed since you bought your car, you owe it to yourself to check out your refinancing options. Let's look at some common life changes that might make refinancing a good option. Read on to learn about three scenarios where refinancing your vehicle might makes sense:
Your credit improves
One of the biggest factors in determining your auto loan status is your credit score. When your lender prepares your loan, a credit report is pulled as a central part of that process. Your credit score helps define your interest rate and what other fees your lender might charge.
It's worth getting and keeping a copy of your credit report. You can do that for free once a year at www.annualcreditreport.com. That will let you track changes to your credit score over time to see if your credit score is improving. It can take as little as nine months of steady repayment to boost your credit score, and that could result in a cheaper loan if you refinance.
If you didn't have much experience with credit when you purchased your vehicle, refinancing could benefit you. Interest rates as high as 18 percent are common for borrowers who have little to no credit history. Having even a few months of solid payments on your side may improve the rate.
You didn't shop around when you bought your car
If you didn’t shop around for a loan when you bought the vehicle, it's definitely worth doing now. You may have overlooked a great interest rate that might save you money over the lifetime of the loan.
You need to change your monthly payment
You may be in a much better financial situation now than when you bought your car. You may have a better job or more security. You may have paid off credit card or other debt. All of these things free up how much you can pay per month.
Most people don't go into the refinancing process looking to increase their monthly payment, but you can save yourself money in the long term by committing to a faster repayment plan. If you can afford to pay more per month now, you can pay off the balance on your car faster. Shorter-term loans may have lower interest rates since the lender assumes less risk in making the loan. Once the car is paid off, you'll have all that money to devote to other saving or spending priorities.
If you don’t want to bother with refinancing, just make larger payments each month. Not only will you pay off your car faster, you’ll be surprised at how much that could save you over the life of the loan.
On the other hand, if money is tight, it might be a good idea to refinance into a longer term. While you might end up paying more in interest, you can reduce your monthly payment and free-up the money you need right now.
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