What You Need To Refinance Your Car – Emily Delbridge is an authority on car insurance and loans who has contributed to The Balance for nine years. Delbridge is a licensed Personal Lines Insurance Agent who has been in the insurance business since 2005. Since joining the industry, she has contributed significantly to the book of business for an independent agency, Great Michigan Insurance.
Thomas J. Brock is a CFA and CPA with over 20 years of experience in various fields including investment, insurance portfolio management, finance and accounting, personal investment and advisory on financial planning, and the development of educational materials on life insurance and annuities.
What You Need To Refinance Your Car
If you’re short on cash or you see a better interest rate advertised, refinancing a car loan may seem attractive. While you can sometimes get a better deal from a different company, it’s essential to take a close look to make sure you benefit from refinancing. Refinancing has pros and cons, and the best option depends on your situation.
When Should I Refinance My Auto Loan?
One of the best reasons to refinance a car loan is if you have the opportunity to lower your interest rate. If you previously had no credit or bad credit, it’s worth checking to refinance your car loan after a few years to see if you get better offers. Your credit score may have improved enough to qualify you for a lower interest rate. With a lower interest rate, you will be able to pay off your loan faster or reduce your monthly payment while paying it off at the same pace. In any case, you will pay less over the life of the loan.
Sometimes, an expensive occurrence like having a baby, unexpected medical bills, or a natural disaster can put you in a situation where you have to reduce your monthly expenses. Refinancing can allow you to extend the length of your loan, thereby reducing your monthly payments. For example, if you have two more years on your current loan, it may be possible to refinance and extend the term to four years.
Adding two years to your loan should substantially lower your monthly payment, depending on the interest rate you receive. You’ll be paying for two more years, but you’ll free up some cash each month, helping you get through a rough patch. Keep in mind, however, that this will also mean that you will pay more interest over the total life of the loan.
Changing lenders can be for or against, depending on the relationship you have with your current lender. If your lender has poor customer service, switching lenders can be beneficial. If you like your lender, you can try refinancing with them, but you may need to look elsewhere to get the best rate.
How To Refinance An Auto Loan
If you currently owe less than what your vehicle is worth, you may be able to access more cash by refinancing. For example, let’s say you’ve owned your vehicle for three years. Your vehicle is currently worth $8,000, and you still owe $5,000 on your auto loan. You need money for a small home improvement project. One option would be to refinance your vehicle for $6,500. You’ll still owe less than the vehicle is worth and have $1,500 of new cash available to spend after the new loan pays off. your previous balance of $5,000. The $1,500 can now be used for your home improvement project.
Be careful, though. A car, unlike a house, is always a depreciating asset that can lose more than 10 percent of its value in the first month of ownership and more than 20 percent in the first year.
You don’t want to risk going underwater with your loan—that is, owing more on your car than the car is worth.
Sometimes you can refinance at a lower interest rate, but because the loan is extended, you actually pay more over the duration of the loan. Use a loan calculator to make sure you’re saving money overall. Having a lower monthly rate may be what you’re looking for, but if you really want to pay less overall, it’s important to do the math.
Refinancing Your Auto Loan Can Lower Your Payments
For example, if you have a loan of $5,000 with an interest rate of 10% paid over two years, you will pay a total of $5,537. However, that same loan extended over five years ends up costing you $6,374. That’s $837 that could have been spent on something else. So make sure you only extend your loan if you need to.
Freeing up quick cash is sometimes the only reason for refinancing a car loan. Beware of higher interest rates, however, because many lenders charge higher rates on older vehicles. When you are looking to refinance your aging car, you may be surprised at the interest rate available to you compared to what you received when the car was new or nearly new.
Many banks, including USAA Bank and Bank of America, do not charge an application fee for auto loan refinancing.
Consider all your options before you commit to refinancing your car and check around to see what interest rates are available. Keep the length of the loan as short as your budget allows. Having the shortest loan term along with the lowest interest rate will ensure that you are getting the best car loan possible.
How Many Times Can You Refinance A Car Loan?
There are no specific rules about how quickly you can refinance after taking out an initial loan to buy your vehicle. However, you may at least need to wait until you receive your title that shows the original lender as the lien holder. Your credit may have taken a hit after the original loan as well, so it may help to wait a few months to recover.
Exact refinancing costs will vary. Most auto lenders don’t charge application or origination fees, and auto loans typically don’t have prepayment penalties. The cost will most likely be in terms of total interest if you extend the loan term, so be sure to review all the terms on your current and potential new loan.
Although there is no limit to the number of times you can refinance, it’s probably not a good idea to do it too often. Regularly applying for credit will negatively affect your credit score and make it more difficult to get good loan terms and rates.
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Should I Refinance My Car
A significant shortage of major auto parts and the lack of inventory of new cars as a result of the pandemic has forced many people to put the pin in the score of a new set of wheels. In addition, the lack of inventory is causing an increase in the average price of cars for both new and used cars. Sticker prices for new cars rose 8.6% year over year, and used car prices rose 27%, according to data from Edmunds.
But even if you won’t be riding a new set of wheels this fall, you can still use your car or truck to do something almost as exciting — save money. The auto represents the third highest share of US household debt, with Americans owing more than $1.4 trillion on their auto loans as of 2021. So working to reduce car loans can be huge when it comes to debt management.
If you didn’t look for a car loan the first time, or if your credit score prevented you from receiving a favorable interest rate, you may be able to benefit by refinancing now. If you are interested in auto refi, here is what you need to consider.
Refinancing a car means paying off your existing loan and replacing it with a new loan. Even if refinancing doesn’t reduce the principal loan amount, a more favorable annual percentage rate (APR) term can help you save money in the long run. According to a 2019 survey by our company and The Harris Poll, a third of Americans surveyed did not know the APR on their car loans, but you don’t have to fall into that set. Get educated about your existing loan to understand how your monthly payment breaks down. Find out how much goes to interest versus the actual car payment. It is also good to get a sense of how much of the total loan payments are interest payments.
Refinance Your Car Loan
Chances are that if you do not turn to your
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