Refinancing a car loan involves taking out a new loan to pay the remaining balance on the original loan. Refinancing your car can be a good idea under the right circumstances, but it is definitely something you should do some research on before deciding.
Refinancing your vehicle can be advantageous if your financial situation has improved. If you are making more money now than when you originally financed your car, your debt-to-income (DTI) ratio has improved, which could mean that you can qualify for a better interest rate. The same is true if your credit score has improved substantially since the loan originated. A lower interest rate could mean noticeably lower monthly payments.
Refinancing your old loan may also be worth looking into if you find a better deal. It could be that you financed your original loan through one kind of lender and ended up with a higher interest rate than your bank or credit union is able to offer you. Shop around for competitive rates and see what kind of rates a different lender is willing to offer you.
In these situations, the best course of action is to talk to a loan officer or a car loan specialist. You will want to see what, if any, limitations there may be on refinancing your car. For example, some banks won’t refinance a car over a certain age or with too many miles on it. Depending on the age and how much your vehicle may have depreciated, it is possible your loan cannot be refinanced. Also, auto refinancing may negatively affect your credit score. So, if you are planning to make any other large purchases that hinge on a higher credit score, you may want to avoid refinancing your auto loan until later.
You will also want to see what kind of fees are involved. If your current auto loan has any penalty fees for prepayment, then it may not be financially prudent to pay off the existing auto loan. Depending on the type of vehicle loan you have, you may have already paid most of the interest off. This means that, by refinancing your car, you will end up with even more money going towards interest in your monthly payments.
If you are upside down on your car, where you owe more than the car is worth, you may be unable to refinance your current auto loan. Likewise, if you have bad credit, you may not be eligible for a new loan. But, if you are in a situation where you need to lower your monthly payments, you can talk to your existing lender to see if they can renegotiate the terms of your current loan. By extending the life of the loan, you may be able to lower your overall monthly payments.
If the conditions are right, refinancing your car loan may make good financial sense. Shop around and see what kind of rates are out there and talk to your existing lender to see if there are any penalty fees that you would have to incur with an auto refinance. By doing some investigating, you can see if refinancing your loan with a new lender is the right move for you.