When you need to refinance your car there are only a few reasons it makes sense. Refinancing isn't for everyone, but it's the way to go in some cases – especially if you need to save money each month. Here are some reasons you may want to refinance, plus some reasons why you may want to avoid refinancing a car loan.
4 Reasons to Refinance A Car
The main reason most borrowers choose to refinance their auto loans is to save money. However, it's not the only reason you may come to the conclusion that refinancing is the way to go. Here are some situations where many borrowers consider refinancing:
- Your credit situation has improved. In some cases, a better credit score is your ticket to qualifying for different rates and terms on your auto loan. In fact, a good or improved credit score is often one of the requirements of refinancing.
- Your interest rate is really high. A high-interest rate is a common reason for attempting to refinance your auto loan. If you didn't qualify for a rate as low as you thought you would, you can always shop around for refinancing rates to see who can help.
- You want to remove a cosigner. If you didn't have the credit score to qualify for an auto loan on your own, you may have had to get a cosigner to help. If your situation has improved and you're able to qualify for lending on your own, the only way to remove a cosigner from your loan is to pay it off or refinance.
- You need to lower your monthly car payment. For the most part, this should be the only reason for refinancing your car loan. If you're paying too much each month you can opt to refinance for either a lower interest rate, a longer loan term, or both. Be aware that only a lower interest rate can help you save money in the long run. If you extend your loan you'll pay less each month, but end up paying more in interest charges over the life of your loan.
3 Reasons Not to Refinance A Car
Refinancing isn't always possible, and you have to qualify to refinance your vehicle. Though there are a few reasons you may consider refinancing a car, there are several reasons to consider not refinancing, too.
- You want a shorter loan term. A shorter loan term will increase your monthly payment but may save you money overall in interest charges. But you don't need to through the hassle of refinancing. You get the same results by just making a larger monthly payment. To see how much more you should pay simply divide your remaining loan balance by the number of months you want to pay. The answer is your new monthly payment. If you find your situation changes, you're not locked into a new contract with a higher payment, you can simply go back to making your minimum payment without risking default.
- You have negative equity. Refinancing isn't possible unless there's some value in your vehicle. To refinance your car must be worth at least as much as you owe on the loan. To find out if your vehicle has equity, check website valuation tools such as Kelley Blue Book and NADAguides to answer a few questions and get an estimated value for your car. Then, compare this amount to a 10-day payoff amount from your lender.
- You have pre-payment penalties on your auto loan. These aren't very common anymore, but if you're stuck with a contract that uses them, refinancing may not be worth your effort, literally. Some loans impose fees when they're paid ahead of schedule, even in cases of paying off the loan for refinancing. In this case, any equity you have may not be enough to offset the charges, which vary by lender. These penalties must be paid when you close the loan and if you don't have savings you could be taking a loss by refinancing.
Qualifying for Refinancing
Whether or not refinancing is a good idea for you is up to your independent situation. But, if you do decide to give it a go, you and your vehicle have to qualify for refinancing. You need to have had your loan for at least one to two years, be current on your payments, and have a good or improved credit score.
Your vehicle should be no more than 10 years old as a general rule and have no more than 100,000 miles on it. Though it's more common to find older higher mileage vehicles on the road these days, lenders don't always take the risk to refinance them, though this varies by lender.
Lastly, your loan must be an acceptable amount for the new lender (or your current lender) to refinance. You can't owe too much, or be too close to paying off your loan. If you're not sure where to start, we want to help. At Auto Credit Express we work with many refinancing partners, and we want to connect you with one for your situation. To find out how we can help simply fill out our auto loan refinancing request form today.