How Do You Determine If You Should Refinance Your Car?
Are auto loan interest rates going down and all you can think about is your current loan? Before you decide to refinance, make sure you understand that there are both good and bad reasons to do so. There’s no universal rule about when you should refinance, but it comes down to your current loan details and your financial situation.
What is the First Step to Refinancing a Car?
Before even thinking about refinancing, review your current loan agreement to identify any prepayment penalties or restrictions. Prepayment penalties apply when the borrower pays off the loan before the term’s end date.
Make sure your credit score is accurate and up to date. You can request a free credit report to see if it’s good enough to get you the best interest rate. This check is considered a soft inquiry, which means it won’t affect your credit score. Most financial institutions recommend having at least 661 – 680 for the best opportunity at a low interest rate. If your credit score is below that range, then consider taking steps to improve your credit score if refinancing isn’t an immediate need.
When applying for the refinancing, make sure you have all the necessary documentation, which includes:
- Proof of income
- Your current loan agreement
- Vehicle registration / proof of insurance
When Refinancing is a Good Idea
- Lower monthly payment – If you bought your car when interest rates were high, refinancing can save you money if interest rates have dropped.
- Your credit score has improved – You’ve improved your financial situation since buying a car and a lower credit score prevented you from getting a lower rate.
- Pay off the loan sooner – If your income has increased since taking out the auto loan. Borrowers don’t have to refinance to do this. They can increase the amount they’re paying each month if there’s no prepayment penalty.
- Want to switch lenders – Either through better incentives from a different lender or your primary financial institution can consolidate loans from other places. Typically, credit unions can offer lower interest rates and more flexibility.
- Struggling to make the monthly payments – Refinancing can help you extend the terms of the auto loan.
- Need extra cash – Borrowers can use the equity in their vehicle for a cash-out auto refinancing option, which means taking out a higher loan amount when compared to the current loan and getting the difference in cash.
When Refinancing May Not Be a Good Idea
Credit Score is Lower
Rates might be going down, but that doesn’t mean refinancing is a good idea. If you purchased your vehicle less than 6 months ago, your credit score is still recovering from the hard inquiry performed on it from the purchase of the vehicle. Refinancing would come with another hard inquiry on your credit report, further lowering your score. Also, remember to check your credit score to make sure it hasn’t decreased since the initial financing after the 6-month period.
The Car’s Value & Age
You’ll also want to assess the value of your vehicle and its age. Refinancing might not be a good idea if you owe more on the car than it’s currently worth. Or if the car is a certain age, it might not quality for refinancing.
Current Loan Term is Almost Finished
If you’re about to pay off the loan, you’re likely better sticking with your current loan offer than refinancing the small portion that’s left. Especially if your current loan includes prepayment penalties or other fees.
It’s always a good idea to make sure that refinancing an auto loan will save you money and not add more to your debt. You can use our auto loan calculator to get a better idea of the financial obligation involved with refinancing compared to your current loan terms.
How Would You Decide Between Auto Loan Offers?
When researching refinancing offers between different financial institutions, here are some things to look out for:
- Annual Percentage Rate (APR) – This is the interest rate plus any fees or additional costs associated with the loan for the year. The lower the percentage, the less you’ll pay in interest.
- Length of the Loan – The number of months that make up the term of the loan. The longer the term, the more you’ll pay in interest.
- The Total Amount Financed – The amount of money you’ll borrow from the lender, which can affect your interest rate and loan term.
Conclusion
If you’re having a difficult time figuring out if you should refinance your current auto loan agreement, start with our monthly car payment calculator to work out the financial details. If you still have questions, talk to the auto loans express team at Community First Credit Union. We’ll help you review your financial situation so you can make an educated decision on whether refinancing is right for you.
