There are many reasons why someone would want to refinance a car loan, but in most cases, it's done in order to save money. This is usually done by securing a better interest rate or changing the loan term. However, saving money can mean different things to different people, so it's important to consider all aspects of both your current loan and any potential refinanced loan before committing to it.
Refinancing a Car Loan: What Does It Mean?
When you refinance a car loan, it means that you are replacing your current loan with a new one with different terms, usually from a new lender. Basically, you swap lenders in order to get terms that are more favorable for you and your current situation.
There are several reasons why a person may want to refinance their auto loan, but the most common ones are to secure a lower interest rate or to change the loan term in order to save money. A lower APR can lower the monthly payment and reduce the cost of interest long-term, which can save a borrower hundreds (or even thousands) over the life of a loan.
There is no minimum waiting period to refinance a car loan after buying a car. And the younger the current loan is, the more money refinancing can usually save a borrower. However, before refinancing, you would be wise to make sure that you understand your motivations for doing so and that it can accomplish the outcome you are looking for.
Times Where It Makes Sense to Refinance a Car Loan
Refinancing can have different outcomes for different borrowers, so it is important to understand why you want to refinance. Here are a few scenarios where it would (generally) make sense:
- If Your Credit Score Has Improved
The APR that you qualify for is largely dependent on your credit score. If you have been keeping up with all of your bills and making all of your car loan payments on time for a year or two, it's possible that your score has improved since taking out the loan. Or, perhaps some negative items have dropped off of your credit reports. If your credit score has improved, then you might qualify for a better interest rate. Refinancing the loan with a better APR, even if it is an improvement of just a percentage point or two, can help you save money over the remainder of the loan term.
- If Interest Rates Have Dropped Since You've Taken Out Your Loan
The Federal Reserve, or the Fed, controls the overall market interest rate. If interest rates have declined since you took out your initial car loan, it is possible that you can qualify for better terms even if nothing else about your borrower profile has changed. Currently, interest rates are at historically low levels, but the Fed raised them once at the end of 2015 and has plans to do so again in 2016.
- If Your Financial Situation Has Changed
Borrowers who have seen positive change in their financial situation, such as those who have gotten a raise or a higher-paying job, may want to refinance in light of this. Generally, these types of borrowers will want to shorten the loan term in order to pay it off faster. Conversely, some borrowers may find themselves at the mercy of a negative financial change. If these people are in extreme danger of missing payments or defaulting on the loan, they may try to refinance with the goal of extending the loan term to lower their monthly payment. This will help them free up money in their budget in the short-term, but results in them paying more in the long run.
Generally speaking, refinancing can be an excellent money-saving strategy when a borrower stands to receive a lower APR or shorten the term with a lower APR. This will not only allow them to pay off the loan faster, but also reduce the amount of interest charges they end up paying.
However, those borrowers that simply want to free up money in their budgets by extending the loan term will find that they will most likely end up paying more for the car in total than they would have without extending it. Unless the situation is dire, we wouldn't recommend this course of action.
Can Borrowers with Bad Credit Refinance?
At Auto Credit Express, we have been helping people with damaged credit find financing for close to 20 years. Our customers tend to ask questions about refinancing because they want to know if it can save them money.
What we tell them is this: refinancing options are typically only available to those with good credit scores, so it can be done if the borrower is far enough along in the process of re-establishing their credit. If you have kept current on your loan and all of your other obligations for around 18 to 36 months, it's entirely possible that you may qualify for better terms if you refinance.
However, not all credit-challenged consumers will be able to refinance, as the circumstances have to be just right in the majority of cases. For example, you have to have equity in the vehicle and you have to be current with your payments if you want to refinance a bad credit auto loan. Qualifying for refinancing can be tough until you have taken the necessary time to rebuild your credit and improve your score.
Sometimes, borrowers may find that it more beneficial to trade in their current car in order to open themselves up to more potential financial options, rather than refinancing. Or, they might have less than perfect credit and are seeking to get approved for a loan in the first place. Either way, Auto Credit Express can help them on their mission to get approved for an auto loan with less than perfect credit.
We have the connections that can help you get the vehicle that you need, and the service we provide is completely free of charge. To get started, all you need to do is complete our fast and easy online application, and then we'll get to work for you.