Refinancing a car loan is substituting your current lender with another one that provides better rates and terms. The primary goal of refinancing your auto loan should be to reduce the overall interest paid during the lifetime of the loan. Also, refinancing can help to lower your monthly car payments and improve your overall cash flow. The most fundamental part of refinancing your car is to do thorough homework and understand how the whole process works. If you fail to do so, you may find the opposite of what you had initially expected. Below are three indicators that may show it’s time to refinance your vehicle:
- An improvement in your credit score;
- A dip in your income; and
- The need for a better interest rate.
An Improved Credit Score
Has your credit score improved since you took your current auto loan? If yes, then it may be a stepping stone towards getting a lower interest rate. Visit your financial consultant, or credible websites and learn how to raise your credit score. With a good credit score, you might even qualify to get a cosigner removed from your auto loan. It’s worth finding out your current credit score status: if your score has improved, it could be an appropriate time to refinance your loan for a better offer.
A Dip in Your Income
A reduced salary can force you to cut down on your monthly expenditures. Refinancing your auto loan for a lower monthly payment at such a time can help you create a less strained budget. The move can help you keep up with your bills until your income improves.
A Better Interest Rate
Refinancing might make sense if you can borrow at a reduced interest rate compared to your current one. If all other factors remain constant, a lower interest rate means that the overall cost of the car will be lower when considering the interest costs. It will also reduce your monthly payments as the interest rates are part of the required payments. Bottom line, a better offer is worth taking in an effort to save some money on your auto loan. It’s worth pointing out that if the national interest rates have improved, most lender will readjust their rates accordingly, which will be a good time to shop for a new lender to refinance your loan at a better offer.
The process of refinancing your auto loan is simple. According to Philip Reed, all you need to do is gather the documents containing the loan and vehicle information, confirm whether your credit score has improved, compare offers from different lenders and use the information to re-evaluate the benefits of refinancing. When fully satisfied complete the deal with the best lender.
The following are common mistakes that you should avoid when refinancing your auto loan.
- Stretching the term of the loan: It usually equates to paying more for your car, which means that you will owe more than the car is worth. So, when refinancing, try taking the shortest-term offer.
- Waiting a long time to refinance your car: Newer vehicles generally have better refinancing rates and incentives; additional lenders have an age limit on cars they refinance. The sooner you get the rates down, the sooner you start cutting costs, and the higher your savings will be.
- Missing your monthly payments: This will ruin your credit score.