People often refinance a mortgage on their home, but did you know that under certain circumstances, you can also refinance an auto loan? Depending on your situation, this might be something you might wish to investigate.
The Three Signs It Might be a Good Time to Refinance
Refinancing may sound like a complicated process, but it’s a fairly simple concept. In the most basic sense, refinancing a car means taking out a new loan to pay off the original one.
The new loan typically involves different and better terms, which will bring various benefits. Why would you want to refinance a car loan?
Here are three specific situations where it would make sense:
1. You Have a Really High Interest Rate
If you’re still paying off a car loan that was granted in 2013 or earlier, then chances are the interest rate on your loan is much higher than current rates. Interest rates have plummeted nationally, and are at the lowest point they’ve been in years, but this probably won’t last much longer.
You can still secure a loan from certain lenders for less than 2.50 percent. If you’re paying 6 or 7 percent on an old loan right now, then refinancing makes a lot of sense.
2. Your Credit Score Recently Improved
Have you become more financially responsible in recent months? Are you making payments on time and not taking out any additional loans?
If so, then there’s a good chance your credit score has improved. A substantial jump in your score could mean you qualify for a much more favorable loan.
“If your credit was average or your report had a few dings when you financed your car, you probably didn’t get the best interest rate or terms,” Auto.Loan points out. “When you refinance, this gives you a chance to show off your new credit rating to a lender who will most likely respond by giving you a better deal than you could have gotten previously.”
The difference between a 500 credit score and a 600 credit score (or 600 for your credit score versus 700) is huge. The lower scores could ultimately cost you thousands of dollars in interest over the life of the loan, so if your numbers have improved, it’s definitely worth going through the hassle of refinancing.
3. The Monthly Payments are Constricting
Do you reach the end of the month and find you don’t have enough money to pay the bills or buy groceries for your family? If you’re having to make a monthly car loan payment of $600 or $700, that’s clearly part of the reason.
If you refinance, you can significantly lower your monthly payment. You’ll have to increase the length of the loan, but if saving a few hundred dollars a month means the difference between keeping the lights on and having the power company shut off your utilities, it’s entirely worth it.
Consider All Your Options
It’s crucial to note that refinancing isn’t going to be the best move for everyone. There are times when refinancing could actually be a terrible choice.
For example, you never want to refinance in order to pull cash out for a vacation or fund a house repair. Also, if you refinance when the loan amount is very close to the car’s value, you risk owing more than the car is worth.
This is known as being “underwater,” and it’s a difficult financial situation that could have a negative impact on your finances for years to come.
But if you’ve walked through all your options and sought advice from trusted sources, refinancing still looks like the best choice, then go for it. In a range of situations, it could lead to an optimal outcome. Make the decision that’s best for you.