If it’s a struggle to pay your monthly bills, you may want to think about refinancing your car loan. Refinancing could potentially be a way to save money, lower your monthly payments, or even pay off your loan faster. However, refinancing isn’t always a good idea, so it’s important to make sure it fits into your financial strategy in a way that makes sense.
Refinancing is simply the transfer of your car’s title from one initial creditor to another. There are a number of situations in which it might make sense to refinance, including the following.
Your credit score has improved
One of the first reasons to consider refinancing is when you’ve boosted your credit score at least 50 points.
If you purchased a car during a time when you had a low credit rating or no credit at all and have improved your score since then, you may be eligible for more favourable rates. Drivers with a poor credit rating often pay high interest rates of 18 percent or even higher, so it makes sense to lower this if at all possible.
If you’ve made on-time payments on your car loan for several months, you may be able to refinance the loan.
Interest rates have dropped
Another good reason to consider refinancing is if interest rates have dropped since you initially purchased your vehicle. Even if interest rates have only dropped two points, this could add up to significant savings over the full lifespan of your auto loan.
You can’t afford your current monthly payments
Are you struggling with your current payments? If your bills are more than you can currently afford due to changes in your financial circumstances, refinancing could allow you to lower these monthly payments.
However, this will be accomplished by lengthening the loan term overall, which means you’ll be paying more money in the long run.
Think long and hard about whether it’s really worth it to extend your loan life to save a bit of money in the short term. Over time, your car will be worth less and may be harder to sell after you’ve finally paid it off.
You agreed to an unfavourable initial rate
In the excitement of buying a new car, you may have agreed to loan terms that weren’t the best possible deal. Fortunately, refinancing gives you a second chance to shop around for a better deal.
If you took out a loan directly from the auto dealer, you could be paying too much. Dealer-sourced auto loans tend to involve higher rates than bank or credit union loans, because the dealer serves as a middle man and needs to make a profit. It may be worth your while to refinance your loan with a bank or credit union.
You want to shorten your loan
A good long-term financial strategy is to secure lower interest rates through refinancing and then keep paying the same monthly amount, if you can afford it.
This will help shorten your loan terms, because you’ll be paying off the total amount at a lower interest rate. Shaving off even a few months of your loan repayment can save you hundreds in interest payments.
These are examples of valid reasons to consider refinancing. Before you agree to new loan terms, it’s wise to take a hard look at your current financial situation and shop around to find the best possible rates.