What to consider BEFORE you refinance your car

You’ve probably heard of refinancing a mortgage. But did you know you can also refinance an auto loan? In fact, the process of refinancing an auto loan can be a lot simpler and more straight forward than refinancing many mortgages.

Refinancing your auto loan can save you money in several ways. It can lower your interest rate, reduce your monthly payments and leave you with terms that make sense for you, but as with anything involving money and credit, it pays to understand what you’re getting into. It’s easy to look at a lower monthly payment and get excited, but you should also look at the interest rate and fees and consider them within the context of your long-term financial plans.

Car owners may consider refinancing for several reasons:

  1. Your current loan has a high interest rate

This could be because you took a bad deal on financing or couldn’t qualify for a cheaper loan at the time.

  1. You’d benefit from lower monthly payments

Budgets change, and a lower monthly payment could help free up cash for other financial necessities. Even if you keep the same interest rate but extend the period of your loan, you could have a lower monthly payment. Just be aware that this can put you at risk of eventually owing more on your loan than your car is worth (also known as being upside down on your loan).

  1. You want a different loan term

Maybe you’d prefer to make lower monthly payments over a longer term, or maybe you want a new loan with a shorter term and lower interest rate. Whatever the case may be, you may be able to shop terms that make better sense for you.

Refinancing may seem like a no-brainer for everyone who doesn’t want to lower their interest rate or monthly payment? But experts warn that refinancing doesn’t always make financial sense. Refinancing can be a good option if it helps you lower your rate, shorten your loan term or both. Why? Depreciation is another way of saying that a car’s value can decrease the longer you own it. Refinancing could help you avoid a situation in which you owe more on your car than it’s worth. But it can also exacerbate that situation if you’re not careful.

For example, a loan with a lower monthly payment may also come with a longer term. The longer you spend paying off your car, the more likely the car will depreciate and the more at risk you are of going upside down on your loan.

Whether you’re applying for a credit card or buying a home, your credit scores can go a long way in determining whether a lender will do business with you. So how important is your credit if you want to refinance an auto loan? Most experts agree it can be crucial. Lenders use several factors to decide your auto loan rate, but two of the most important factors are your credit and debt to income ratio, which is calculated by dividing your monthly debt payments by your monthly income.


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