6 signs it's time to refinance your car loan
A car loan is the most convenient way to finance a vehicle, but not all loans are created equal. Luckily, there are a few easy ways you can figure out when to refinance a car loan. Whether the market has shifted or your financial situation has changed, a simple refinance could help you get the most benefits out of your car loan. Read on to learn the 6 signs it may be time to refinance your car loan.
1. Interest Rates Have Dropped
Interest rates go up and down with the market. So if you took out your car loan some time ago, current rates might be lower than the annual percentage rate (APR) you're paying now. A lower APR could mean your monthly payment goes down. You'll also pay less total interest over the life of your loan. Just make sure there are no prepayment penalties or other fees that may outweigh the gains.
2. Your Credit Score Has Improved
Your credit score impacts the interest rates you get for a car loan. Generally speaking, the better your credit, the lower your rates. So if your financial situation has significantly improved since you took out your original loan, you might be able to refinance your car loan and get better interest rates. Lower interest rates will save you money each month as well as over the entire length of the loan.
3. You Need a Different Monthly Payment
Maybe your finances have suffered lately because you lost your job or got hit with a ton of extra expenses. Whatever your reasons, a longer loan term will mean a smaller monthly payment. If you refinance your car loan to extend the loan term, you might end up paying more total interest over the life of the loan. But the higher interest could be worth it because you'll be able to meet your monthly budget more easily. In contrast, if your finances have improved, you may want to refinance for a shorter loan term. A higher monthly payment means you'll pay your loan off faster and pay less interest.
4. You No Longer Need Your Cosigner
A cosigner is a great way to get a car loan if you're just starting on your credit journey, or you need to repair bad credit. But maybe your financial history is looking great now, and you want the loan to be solely in your name. The easiest way to become the sole name on your car loan is to refinance. Just be sure to think about how much time you have left on your loan. If there's only a short time remaining, it might not be worth it. But you'll be able to take out your next loan by yourself!
5. You Didn't Get a Good Deal On Your Original Loan
Getting your car loan through a dealership might have seemed like a good idea at the time. After all, everything was in one handy place and the dealer probably knew his stuff. But certain dealers and other lenders might not always have your best interests at heart, and they might have hiked the interest rate or lumped in a few extra fees. If you feel that happened to you, reach out to a financial advisor and see if they have a better offer for you to refinance your car loan.
6. You Have Equity and Need Cash
Equity is the difference between what your car is worth and what you owe on your car loan. So if your car is worth $8,000, and you owe $5,000 on it, you have equity of $3,000. In this case, you could refinance your car loan for, say, $6,500, and then you'd get the extra $1,500 in your pocket. You can use the money for anything you like, and your car loan amount would still be less than what the car is worth. Just remember that cars keep depreciating, or losing value, over time. So make sure your new loan isn't for more than the car will soon be worth.
How to Apply for a Car Loan Refinance
Now that you've figured out when to refinance a car loan, the next question is how to do it. Luckily, it's even simpler than when you took out your original loan because you already have all the information ready.
Here's what to do when it's time to refinance your car loan:
- Decide why you want to refinance and draw up the pros and cons.
- Check any fees you have to pay on your old loan, and for the new loan, and make sure the benefits will outweigh the costs.
- Your car loan refinance may knock a few points off your credit score, at least until you start paying it off. So make sure a small, temporary dent isn't a dealbreaker for you.
- Gather all the documents you need, including car title, registration, and insurance, plus proof of your income and identity.
- Shop around to different lenders and find a car loan that's more competitive than the one you have now.
Note: Getting prequalified for your loan means you'll be able to find out exactly what APR you'll be given for your desired term. And prequalifying isn't likely to affect your credit score.
When to Refinance a Car Loan: Let ALEC Help!
There are many great reasons to refinance your car loan, and it's a simple, stress-free process. So if you feel you're paying more than you should for your original car loan, now is a good time to find out about refinancing. Discover how much you can be saving today with our loan refinance calculator.