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When it makes sense to refinance your auto loan
Every month, you make your auto loan payment, and every month, it’s the same amount. This consistency is good for budgeting, but the amount you pay may not be as low as it could be. When was the last time you questioned how much you’re paying for your car?
It’s possible that you could reduce your monthly car payments by refinancing your loan. Refinancing isn’t the right path for everyone, and it’s all about timing. But checking out this option from time to time could pay off in the long run.
The decision to refinance should be one based on facts and logic. It’s easy to determine whether now is the right time by following a few simple steps:
Step 1: Determine your current payoff amount
Your current payoff amount is how much you still owe on the loan. This will ultimately be the amount you need to refinance, should you decide to go this route. To find out what your current payoff sum is, check your monthly statement or ask your lender. Keep in mind that some lenders have limits on how much or how little they will refinance, Bankrate reported.
Step 2: Determine the value of your car
Once you know how much you’ll need to refinance, it’s time to compare it to the value of your car. To find the value of your car, check out websites like Kelley Blue Book or Edmunds.com.
A lender likely won’t take the chance on a car refinance loan if the value of the car is lower than the amount you still owe on the loan. If this is the case, your loan is “upside down,” and obviously, this isn’t an ideal situation to be in.
Step 3: Compare interest rates
An auto refinance loan is a good idea when it allows you to decrease your monthly payments by lowering your interest rate. Even a small reduction in your interest rate could add up to hundreds, or even thousands, of dollars in savings by the time you pay down the loan. You could also lower your payments by lengthening the life of the loan, but make sure that it doesn’t cost you more in the long run.
First, take a look at your interest rate. If you don’t know it off the top of your head, ask your lender when you inquire about your current payoff amount. According to Bankrate, typical interest rates for new car purchases right now are around 4.3 percent, while used car loan rates are closer to 4.9 percent. If your interest rate is higher than these rates, it’s possible that you may be able to find a better rate.
Step 4: Consider your financial situation
Your credit score plays a big role in determining what interest rate you qualify for. If your credit score has changed since you got the loan, you may be eligible for a different rate when you refinance. Before you refinance, determine whether your score has changed, and if so, in what way. Do this by looking at your credit report, LearnVest recommended. If your credit score has increased, it could be a good time to refinance. However, if your score has dropped, it might be best to hold off until you can raise it up a bit.
Refinancing your auto loan could be a good idea. It all depends on the state of your loan, your car and your financial health. Be sure to consider all possibilities before making your final decision.