An individual who refinances is replacing an existing loan with a new one, typically from a different lender. In refinancing car loan, you also need to consider the terms of your existing loan, the current interest rate, and your credit score. While you don’t have to wait a certain amount of time to refinance after you buy a car, the sooner you refinance, the greater the possibility of saving. During the first half of the loan, most of the interest is paid off.
Here are some things to know first if you’ve recently received an offer to refinance your car.
Know what impact the change will have on your credit
Every time you apply for credit, your credit score will decrease. Your credit score will be lower, as well, if you then open a new loan account.
Factors driving refinancing
Identify what your primary goal is before you consult lenders. Keeping your current payments constant can help you pay off the loan faster (and with less interest). Consider refinancing car loans to a lower rate but keeping your payments the same.
Examine multiple financing options
A dealer-arranged loan may have been what you used to borrow money to buy your first car. Banks, credit unions, and online lenders lend directly to car owners and buyers.
To start, choose financial institutions with which you are familiar. If you’ve been doing business with the bank or credit union for a while, you may qualify for a loyalty discount.
Despite excellent terms, don’t stop there. Comparison-shop those quotes with those from other banks and lenders. You will need to compare several options to get the best terms for your auto loan, and the more you compare, the better your chances are.
What Your Car Is Worth
It may be difficult to find a lender willing to refinance your loan if you owe more than the car is worth, especially if the rate is low. Underwater means you owe more money than the car is worth.
For underwater cars, refinancing car loan is riskier because the lender could lose money if it had to sell your vehicle. After all, if it had to seize it, it would not get the full amount owed. You may be able to get a lower interest rate on your refinancing if you make additional payments on your existing loan to avoid it falling underwater.
You should consider the fees
If fees affect the overall savings, consider that before refinancing. A prepayment penalty may be applied to your current auto loan. Upon repayment of the former lender, you will be required to pay back your original lender. Regardless of whether a penalty is included in the dealer’s contract, you should check it.
