The number one tip to refinancing your auto loan is to fully understand what you’re getting yourself into. It seems too straightforward to mention, but the truth is that most people are turned away due to sheer ignorance of the situation. First of all, how do you even know that it may be time to refinance your auto loan?
Initial Conditions of Car Loan Lending
One of the more popular reasons for refinancing is if the present-day loan rates are lower than when you first got yours. Why miss a chance to reduce your monthly payments without extending the amount of money you have to pay overall? The economic climate may be such that lenders are willing to increase the risk they’re taking by offering lower rates – but this of course depends (in part) a lot on the caliber of the borrower’s credit.
It’s worth it to point out that not every bank or other lender even offers refinancing; as such, be sure to inquire about this detail at the time you buy your loan. Sometimes, even if it is offered, the conditions may not be conducive to you personally; it all depends on the limits they’ve set. You may need to have higher than a certain amount of money left on the loan in order to be eligible.
Are There Prepayment Penalties
This isn’t that common these days, given the competition. However, there are still some lenders that will hit you with a prepayment penalty for paying off the principal early. It behooves you to know whether your bank does this or not before you count on refinancing to change your loan situation.
Even if there’s a one-time penalty, it could still be worthwhile if the amount of money you save supersedes the amount it costs to pay the fine. There are plenty of online auto loan calculators just for such a thing.
Check All Versions of Your Credit History
Just like obtaining a car loan in the first place is tied directly to your credit score, refinancing for a better option is, too. In fact, it should actually play a part in why you’re refinancing in the first place; if it’s been six months to a year since your first auto loan, your score might have increased enough to place you in a better category of eligibility.
If you have several credit cards, your score might have had two avenues of improvement. By paying the bills regularly, you gain increases; you also gain them by steadily reducing the amount of debt you’re using. The latter is a sizable metric on all charts that denote the percentage of contributions to your FICO score.
This refers to several things. First of all, how much time you have left paying off the principal of your original loan matters; it’s made easy with the online availability of both refinance rates and auto loan refinance calculators.
The decision really comes down to whether or not it is more beneficial to you to extend the term of your current loan to take advantage of lower monthly payments (but end up paying more in total interest), or using your improved credit history/economic climate to pay a lower rate while also receiving a shorter term. Check with your lender to see what’s available, and use loan calculators from multiple sites to make sure the numbers line up before you refinance.