Auto loan refinancing is an easy and recommended way to save money, but is it for you? Read on below to see if you should or should not apply for an auto refinance loan.
You should refinance if:
Interest rates have dropped. The best time to refinance is when interest rates have dropped since you have purchased your vehicle. A decline of even just a few points makes a huge difference—you can save hundreds of dollars over the loan repayment period. At present, auto refinance loan rates are relatively low here in Portland, so you should take advantage of these while you can.
However, if you are determined to save money through a refinance, don’t extend the loan term. If you have four years left to repay the loan, refinance with a lender that lets you repay in four years. Extending the loan term will result in you paying more interest. Opting for a short-term refinance loan will cause you to pay higher monthly payments, but at least you save more money overall.
You didn’t get a good rate the first time around. A high credit score doesn’t guarantee a good rate. Any car buyer, regardless of their credit, can receive a rate higher than what is ideal. If you obtained financing through a dealership, chances are you are with a loan that is more expensive than it needs to be. Fortunately, you need not endure paying for such loan for a long time. While refinancing doesn’t undo the financial damage of the original loan, at least it makes the rest of the repayment period more manageable for you.
Your credit has improved. Before you apply for auto refinance, get a copy of your credit report from each credit bureau at AnnualCreditReport.com and pay for your credit score. See if your credit situation has indeed changed for the better and determine what you can do to further raise your score. If you had no credit or bad credit when you took out the original auto loan, and has since built or improved your credit, you should seriously consider refinancing. With healthier credit, you can get a lower interest rate and in turn more savings.
You should not refinance if:
Your vehicle is older. Not everyone qualifies for an auto refinance, and one of the qualification requirements is age. For most lenders, vehicles that are seven years old and above are no longer eligible for refinancing. In some instances, the restriction is not based on age but rather mileage—the vehicle should have less than 100,000 miles.
The amount you owe is not as substantial. Another qualification requirement for refinancing is the amount owed. Most lenders do not refinance when there is less than $7,500 on the loan. If you have less than $7,500, you should just continue repaying the original loan and do it as soon as you can (if you will not be charged with prepayment penalties).
Your current loan is upside down. If you owe more than the car is worth, you are also not qualified to refinance. No lender will want to assume the loan responsibility when the value of the loan is higher than that of the collateral. Figure out your car’s current value using the Kelley Blue Book before you even consider refinancing.