Does Refinancing My Car Loan Lower My Payments?
It’s reasonable to want to lower your monthly auto loan payments when interest rates start to go down. While refinancing your auto loan can lower your monthly payment, it could also add more cost to the overall amount needed to repay. Depending on your financial situation, there are advantages and disadvantages to refinancing your auto loan.
How to Lower Your Auto Loan Monthly Payment
Simply having a lower interest rate helps with lowering monthly auto loan payments. And when interest rates start falling, refinancing your auto loan can make financial sense. But to get the best rate possible, there are other factors to consider.
Before refinancing, check your current credit score. Interest rates being lower won’t make much of a difference if your credit score is lower than what it was during the original auto loan application process. A higher score means potentially lower interest rates.
Another factor is your debt-to-income ratio. Having a DTI ratio 35% or less means you’ll be on favorable terms with lending institutions.
Just securing the lowest rate possible may be enough to lower your monthly payments. But there are other factors to consider when looking at the overall cost of refinancing.
Pros and Cons of Refinancing
Advantages of Refinancing
- Lower Interest Rate: Can reduce your monthly payment and your overall payment.
- Lower Total Payments: A lower interest rate can help you pay less overall if the term is kept the same or shorter since you’ll be paying less in interest.
- Improved Loan Terms: These include flexible payment options or the removal of prepayment penalties.
Disadvantages of Refinancing
- Extended Loan Term: By extending the loan term, you could end up paying more in interest. Try and take on a shorter or similar loan term. If you’re close to paying off your loan, refinancing to a lower interest rate might not yield enough savings.
- Fees and Costs: Refinancing a loan means paying additional fees like closing costs, origination fees, and application fees. The fees should be compared to the amount saved from lower interest payments to determine how much of a savings the new loan provides.
- Impact on Your Credit Score: Refinancing means taking on a new loan, which involves running a credit check, which can temporarily affect your credit score. Conversely, making payments on time can have a positive impact on your credit score in the long-term.
Financial Goals When Refinancing
Paying Less per Month
If your goal is to save money monthly, a lower rate can help you pay less per month. The immediate benefit of having a lower monthly auto loan payment is the cash that it can free up for other financial obligations like:
- Paying off debt from other loans
- Contributing to a savings or emergency fund
- Freeing up money for other necessary expenses
Even with other financial responsibilities, do not neglect your auto loan payments. Skipping an auto loan payment can lead to fees at best and repossession at worst. Always check with your lender about auto payment defer options to avoid fees or repossession.
Paying More per Month
If your goal is to pay less overall, then paying more per month can help you save money. By keeping the refinanced loan term either the same as the original or shorter, you could end up paying less in interest overall. Even paying off the loan early can offer substantial savings if there’s no prepayment penalty. There’s also the satisfaction of owning your car sooner rather than later.
When taking on a new, potentially higher, monthly payment, it’s recommended that the payment make up less than 15% of your take-home pay.
Refinancing an Auto Loan
Whether you’re looking at the short-term or long-term for refinancing an auto loan, one of our team members at Community First Credit Union can walk you through different scenarios based on your financial situation. Talk to our Express Team at (904) 204-2929, or use our auto loan calculator to get a better understanding of your potential financial responsibilities.
