Refinancing an auto loan may offer many benefits including a lower interest rate and freeing up money for other expenses. So how do you know if the time is right? Here are three factors to consider to help determine if you should refinance your car loan:
1. You could get a better rate
Interest rates can make a difference in both the size of your monthly payment and the total interest you pay over the life of the loan. If your loan's interest rate is higher than rates you see available today, consider a refinance. Lowering your payment by a percentage point or two can make a difference and save you money in the long run.
2. You're having trouble making payments
Financial setbacks and other hardships can happen to anyone. If you can’t keep up with your auto payments, refinancing could help lower your monthly payment in a couple of ways. First, if you secure a lower interest rate, the monthly payments could be lower. Second, you may be able to extend the term of your loan. For example, if you extend the term to 60 months from 48 months, your monthly payment will be lower. However, be aware that extending the term of your loan may increase the total amount of money you would have to pay back.
3. Your credit has improved
Did you have bad credit when you purchased your vehicle? If your credit is better now, you might qualify for a lower interest rate. As we know, a lower interest rate means less money paid and more money in your pocket. It’s also important to note that credit requirements and underwriting processes vary from lender to lender. Even if your credit score is strong, try to make sure your income and work history are equally strong to ensure a well-balanced application.
Do what’s best for you
When it comes to saving money on a car loan, the circumstances and timing need to be right. If refinancing seems like a great opportunity, get in the driver’s seat and go!
*This article has been updated from its original posting on March 31st 2015.
Mitch Strohm contributed to this article.