Consumers may be familiar with refinancing when it comes to home loans, but vehicle refinancing is often off of the radar. Your car loan can take up a large chunk of the monthly income, and this fact is true for the life of a 3-, 4- or 5-year loan commitment. Take a look at when auto-loan refinancing is right for your situation. You may be able to save some money on interest in the long run.
End of Lease Period
Car leases are popular because the payments are extremely low. They only reflect a fraction of the vehicle’s value, and you pay the monthly costs for about three years. At the end of this contract, you have the option of turning in or keeping the vehicle. Refinancing an auto loan is preferable when you want to buy the car from the leasing contract. You’ll need to finance the auto’s balance and remaining interest. If you plan on keeping the car for as long as it’s lifespan, this refinancing option is cost effective for most budgets.
Improved Credit Score
When you initially purchased the vehicle, your credit score may have been low. The resulting interest rate was high. Several years have passed, and now your credit score is much better. Ask several lenders for quotes on your auto loan. They should be able to beat your previous interest rate. By altering the rate, you can save hundreds of dollars over the life of the loan. If the rate cannot be lowered by at least one point, you may want to reconsider the refinancing option. Wait a few months until your score is even better and apply again.
Better Economic Landscape
At times, the national economic climate isn’t conducive toward borrowing money. Your original auto loan may have had a high interest rate even though your credit score was incredibly good. The prevailing interest rates dictated by the federal government were just too high at the time to avoid the high costs. It’s ideal to refinance your loan when interest rates drop by one or two points, states Bankrate. Your credit may be unchanged, but the lower interest rates will only help your monthly payment drop down to a smaller amount.
No Prepayment Penalties
According to the Federal Trade Commission, some original auto loans have prepayment penalties. Essentially, the lender doesn’t want to miss out on certain gains, such as accrued interest. When you initially apply and secure a loan, ask about these penalties and if they apply. It’s preferable to refinance an auto loan when there’s no prepayment penalties associated with it. If you’re unsure, ask the lender about the terms. They must disclose these details as financial professionals. A loan with a penalty may not be a good candidate for a refinancing process.
Being laid off or terminated from a position is a difficult situation, especially with debts to cover. If you have a drop in income, try to refinance the loan. You may be able to extend the terms or lower the interest rate. With a new loan, you can afford the vehicle without harming your other finances. When you don’t have a current employer, however, find a suitable cosigner. You’ll still be able to refinance the loan while remaining financially afloat. Getting back on your feet with a new job will only improve your financial landscape.
Increase in Income
In contrast, try to refinance your auto loan if you have a significant income increase. A 5- or 6-year loan term might be reduced to three years so that you can pay it off faster than before. You’ll save on interest costs while removing this monthly bill from your income too. Calculate what you can put towards the vehicle while still remaining comfortable with other bills. Paying the car off faster is the best way to save money.
Work with a lender who you feel comfortable with during the refinancing process. There are many online and local lenders who can quote a reasonable amount for your borrowing needs. At the end of the day, you live with the loan terms so they should be customized to your monthly income.