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Should I refinance my car loan?
6 situations when you might want to switch lenders.
Trying to decide whether refinancing your car loan is a good idea? You might want to consider it if your credit improved or you recently got a raise — you could qualify for lower rates and more competitive terms. But if your car is super old or you recently took on more debt, you might have a hard time qualifying.
Is it smart to refinance during the coronavirus outbreak?
It could be — especially if your current auto loan provider doesn’t have any payment relief options during the pandemic. Many refinancing providers like Diamond Credit Union are offering deferred payments for up to three months to borrowers who refinance their auto loan right now.
When should I refinance my car loan?
Whether your personal finances have improved or you’re looking for smaller monthly repayments, there are a few situations when refinancing might be for you.
Your credit has improved
Your credit score is often the most important factor when it comes to getting a good deal on a car loan. If you’ve been making on-time repayments toward your current auto loan for the past six months, your credit score has likely improved. Because of this, you could get a lower rate through refinancing, which means you could pay less every month and over the life of your loan.
Your income has increased
The more you make, the less likely lenders are to consider you a risk. If your income has increased, consider refinancing for a lower rate and shorter loan term. If you can afford the higher monthly payment that comes with a shorter term, you could save thousands on interest in the long run.
Your debt has decreased
If you had credit card debt or other loans when you first got your car loan that you’ve since paid off, you’ll have proof that you’re good with your finances. In addition, you’ve likely lowered your debt-to-income (DTI) ratio. This shows lenders that you can afford your repayments, especially if you plan on shortening your loan term. The less risky you look to a lender, the more likely you are to be approved for a lower rate when you refinance.
Your car loan is through a dealership
Dealerships are notorious for marking up interest rates to increase their own profits. If you got financing through a dealership instead of a third-party lender, you might want to see what rates you could qualify for by refinancing. Even if you keep your remaining loan term the same, refinancing with a new lender at a lower interest rate can save you hundreds over the life of your loan.
Your interest rate is high
Having an interest rate over 10% is generally a sign you may be better off finding a new lender — even if your credit hasn’t improved much. This is especially true if interest rates have dropped across the board due to the current lending market. You may not get the lowest rate out there, but you could walk away paying less in interest than you previously were.
Your monthly payments are unaffordable
If your circumstances have changed and you find yourself unable to keep up with repayments — or even if your payments are just larger than you’d like — refinancing your car loan may be a good solution. You may be able to find a lender that can lower your monthly repayments by extending your loan term or lowering your interest rate — or both. This can help you avoid defaulting on your car loan and losing your vehicle.
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3 benefits to refinancing your car loan
Aside from saving money on interest or lowering your monthly payment, here are a few more perks of refinancing:
- Work with a better lender. Some lenders have better customer service, easier account management and discounts that may not be available with your current lender.
- Improve your credit score. If you’ve been struggling to make your monthly payments, refinancing at a longer term could help make it easier to handle your loan and improve your credit along the way.
- Remove your cosigner. If you’ve been making regular on-time payments and want to remove your cosigner, refinancing can be a quick and painless way to remove them while potentially saving you money.
When should I avoid refinancing?
You may want to avoid refinancing if you fall under any of these categories:
- You’ve been late on your car loan payments. Not only is your credit score lower, you’re more of a risk to lenders. In general, lenders want to see multiple months of on-time payments before approving you for refinancing.
- You don’t have a regular source of income. If you can’t prove to a lender that you can make your monthly payments, it’s likely that you’ll be denied a loan offer. You’ll have to supply proof of income — not necessarily employment — to qualify for most refinancing options.
- You’ve taken on more debt. If you’ve recently opened a new credit card or borrowed a personal loan, you likely won’t be in the best position to refinance your car loan.
- You have an older car with significant mileage. Although there are lenders that will refinance a vehicle no matter its age or mileage, most want to see vehicles under 10 years old or 100,000 miles. This way, you avoid borrowing money on a car that might not retain its value.
- Your car is worth less than your loan balance. Lenders are generally unwilling to refinance a car loan if it’s upside down — when you have more debt than your car is worth.
- Your lender charges prepayment penalties. Refinancing involves repaying your loan early. You might not save much if you have to pay extra fees to get out of your original loan contract.
- Your loan comes with front-loaded interest. If you paid most of the interest on your car loan in the first few months or years, you don’t stand to save much by refinancing.
If your personal finances have improved since first taking out your car loan, you may qualify for a more competitive rate or better terms by refinancing. But it might not be for you if your current lender charges prepayment penalties or you recently took on more debt.
Think you can benefit from refinancing? Learn more about how it works and compare lenders with our guide to car loan refinancing.
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