Some borrowers don’t feel the need to refinance their auto loan, but it can offer you many benefits – especially if you had less than perfect credit when you took on the loan.
Refinancing Can Save You Money
The biggest, most shining benefit of refinancing is that it can save you money each month by lowering your monthly payment. Refinancing may also give you the chance to lower your interest rate if you qualify. If you started your loan with a high interest rate due to bad credit, but your credit score is better now, you may be able to benefit from a lower rate.
Since most auto loans are simple interest, a lower interest rate means saving money over the course of your auto loan as well as a lower monthly payment because your interest charges accrue daily.
Here’s a quick example of how much of an impact your interest rate has on your car loan and wallet:
Car loan A:
- $15,000 principal
- 60-month loan term
- 13% interest rate
Monthly payment: $341.30
Total interest charges: $5,478
Car loan B:
- $15,000 principal
- 60-month loan term
- 7% interest rate
Monthly payment: $297.02
Total interest charges: $2,821
That’s a $2,657 difference in interest charges by only changing the interest rate on this loan and nothing else. Interest can add thousands of dollars to the total cost of auto financing, so if you qualified for a double-digit interest rate due to a lower credit score, then refinancing could save you a lot of money.
Keep in mind that you may only qualify for an extended loan term, which doesn’t save you money if you don’t lower your interest rate along with it. Stretching your loan term does lower your monthly payment, but it doesn’t benefit your wallet long term.
How to Qualify for Refinancing
Refinancing works by paying off your current loan and replacing it with another on the same vehicle. To refinance your car, you must apply and qualify. You don’t have to stick with your current lending institution if you qualify elsewhere. Many borrowers look for another lender to refinance with by rate shopping.
One of the requirements for refinancing a car is that your credit score is better than it was at the start of your loan. Another common requirement is that you’ve stayed current on your payments. No missed payments and an improved credit score are critical to increasing your approval odds.
How long you’ve had your loan matters, too, as well as the condition of your vehicle. Here are other requirements you may have to meet:
- Car is less than 10 years old with less than 100,000 miles
- You’ve had your loan for around one year
- You don’t owe too much or too little (this varies depending on the lender)
- Your loan isn’t too close to completion
Strategically and financially, it makes sense to apply for refinancing after about one year of having your auto loan. Some lenders are hesitant to approve a car loan for refinancing that’s less than a year old or approve loans that are nearly done. You also stand to save the most money the earlier you refinance and get a lower interest rate since your interest charges stack up daily.
Refinancing not the Right Path?
Refinancing your vehicle may not work for your situation. Whether you need something more affordable, are looking to get into something new, or are trying for a loan with better terms, trading in your car for something else may be your answer.
Many borrowers struggle to find auto financing because of their credit score. Traditional auto lenders tend to prefer borrowers with good credit, and if your credit isn’t up to par, auto loan qualification is difficult. But here at Auto Credit Express, we want to help you get the connections you need for your credit situation.
We’ve amassed a nationwide network of dealerships that assist borrowers with credit challenges. Get started on your path to an auto loan by filling out our free auto loan request form, and we’ll look for a dealer in your area with bad credit resources.