Refinancing your auto loan means paying off your existing loan with a new loan. One of the best reasons to refinance a car loan is to lower your interest rate and save on the total interest paid. The interest rate can also make a big difference in the amount of your monthly payment. Lowering your interest rate by a small amount can mean significant savings over the life of the auto loan. It may also mean a lower monthly payment if you keep the term as-is.
If you’re looking to lower your payment, finding a lower interest rate is the first step. If it’s a significant monthly saving you’re after, you may be able to extend the term out longer than your current loan. This will help with lowering your monthly payment even more. Keep in mind that extending your term may actually increase the total interest on the loan and you may eventually end up owing more than the car is actually worth. This happens as the vehicle depreciates in value. It’s referred to as being underwater on your loan. The best-case scenario is that you find a low enough interest rate that enables you to lower your term a bit and in-turn still lower your payment. This will save you even more on total interest.
Your credit score will also have a determining factor in the auto loan refinance rate for which you are approved. If your credit score has improved since applying for your existing loan, you may be eligible for a lower rate. Pre-payment penalties are another consideration when determining whether or not auto loan refinancing is worth it. There may be an early payoff penalty or termination fee on your existing loan. Check to see if refinancing will cost you and figure it into your overall savings determination.
Six reasons to refinance an auto loan
- Auto loan rates have gone down.
- Your credit score has improved making you eligible for a lower rate.
- You just can’t afford your current monthly payments.
- You want to change the loan term.
- To remove or add a co-borrower.
- You’re unhappy with your current lender.
Steps to refinancing an auto loan
- Shop around to compare rates and find a lender you trust that offers a low-interest auto loan rate. Be sure to check out Choice One Community Credit Union or your local credit union. Choice One Community Credit Union always offers low loan rates and flexible terms for auto loan refinancing. Lock in a rate quote with the lenders you shop. In addition to APR, compare term, payment amounts, fees, and penalties. Don’t forget to ask about fees. Some lenders may have them, some may not. You won’t know until you ask. Use Choice One Community Credit Union’s handy auto loan calculator for rate comparison between lenders. When comparison shopping, you may find your original auto loan financing wasn’t such a great deal.
- Review your current auto loan. What is your payoff amount? Are there any penalties or other fees for early payoff?
- Gather your auto loan documentation. Here is some of the information you will need:
- Personal information
- Proof of income
- Proof of insurance
- Your current auto loan lender, loan number, and payoff figure
- Your Vehicle Identification Number (VIN) and mileage
- Apply for your new loan.
- Payoff your old auto loan and begin making your new payments
When is auto loan refinancing not worth it?
If you have an older vehicle and are pretty far along in the payments, auto loan refinancing may not be the best option for you. You may have already paid off most of your original loan, which means it may not make financial sense, because most interest is front-loaded. When you get down to your later payments, you are working more on principle.
If your vehicle is not in the best shape, or you are underwater on your loan as we explained above, a lender may not be interested in lending you money, and refinance might not make financial sense. Prepayment penalties that outweigh the savings are another reason to avoid auto loan refinancing.
If you feel that auto loan refinancing makes sense for you, visit the Choice One Community Credit Union website to view rates and apply.