Taking out an auto loan is a quintessential step to purchasing a new or used vehicle. Without a loan, it can be practically impossible to get behind the wheel and have an automobile you can rely on without going into debt. However, there may come a time when auto loan refinancing makes sense. Refinancing an auto loan is a lot like refinancing a home as you will have to go through the same application and approval process to obtain a new loan. Your credit score, debts and financial standing will be considered when applying through a financial institution.
Here are five of the main scenarios you might face that would warrant auto refinancing:
1. Interest Rates Dropped
At the current moment, auto loan interest rates are at an all-time low. This is a staggering change from the once-extortionate rates drivers became accustomed to paying for. In fact, rates have gone down from a whopping 6.04 percent to 4.47 percent in only a year’s time. Rates continue to decline, allowing car owners to better afford their vehicles. After all, when your interest rate is high, most of your payments are going toward paying the interest. Refinancing can lock you into a loan agreement at a lower rate, reducing the amount you pay each month.
2. Your Credit Score Has Changed
If you purchased your vehicle when you had a poor credit score, it’s obvious your rate would be as high as it could possibly be to protect the lender. If your FICO score has gone up since the time you bought your car, you can refinance to get a rate specific to someone who has good or excellent credit. Checking your score is totally free and recommended about once each year. If you think your score has gone up but you don’t know for sure, use companies like Credit Karma or FICO to check those numbers.
3. You’re Using a Bad Company
Some auto loan companies just charge hefty rates and fees to their customers. A bad loan company may charge the same interest rate someone with horrible credit would get even if you have an excellent score; this is just the way they do things to bring in as much profit as possible. Changing loan providers is one reason to refinance and can save you thousands each year if you get locked into a better rate.
4. You Need to Lengthen the Term to Reduce Payments
The average car loan is for a term lasting about five years. If you’ve been paying your car off for two or three years and still can’t seem to get over the hefty payments, you can refinance to lengthen the term. While this may not be advantageous for future hurdles, such as a situation where you’re still paying for a loan when the car is no longer running, it can substantially reduce your monthly payments.
5. You Need to Change a Co-Signer on the Loan
Refinancing allows you to add or eliminate a co-signer for personal or financial reasons. Let’s say your parents co-signed your loan four years ago and now you’re married and living on your own with your own set of unique responsibilities. This would be a prime prerequisite for refinancing in order to remove a co-signer. You might also want to add a co-signer onto the loan, such as a new spouse or relative who is helping to make loan payments.
In order to be successful with your auto refinancing, you need to be conscious of available loans, companies and current interest rates. Consider getting a fixed-rate as opposed to an adjustable one to avoid hikes to your premium. Be wary of companies that offer introductory rates that only increase after the first year or two. Have a clear understanding of what you want to obtain from the refinance so you are prepared for new payment costs and potential road blocks. If your credit score has taken a hit since applying for the loan, this could negatively affect your ability to refinance completely. While auto refinancing offers a number of benefits, it is obviously not the best choice for everyone and can be a lengthy and grueling process for some.