There are many reasons why you might be considering refinancing your car loan. Maybe you want a lower interest rate or you want to reduce your monthly payments to make more room in your budget.
Whatever your reason for considering a refinance, it’s essential that you review your financial status and research your options before making that step.
Just as there are times when refinancing can benefit you, you might also find that a refinance isn’t always in your best interest. Keep reading to get examples of both scenarios below, so you’re better prepared to decide when to refinance a car loan.
When Refinancing May be Helpful
There are various circumstances when refinancing your car loan is a good option. While the below list isn’t exhaustive, it does include some of the most common reasons.
You want a better interest rate
Your interest rate can significantly impact how much you pay each month for your auto loan. If you want a lower interest rate and you believe you can qualify, refinancing might be advantageous.
Here’s an example of how your interest rate can impact how much you pay for your vehicle.
Loan Amount: $25,000
Interest Rate: 7.02%
Loan Period: 60 months
Monthly Payment: $495
Total Loan Amount With Interest: $29,716
Loan Amount: $25,000
Interest Rate: 4.50%
Loan Period: 60 months
Monthly Payment: $466
Total Loan Amount With Interest: $27,965
In the above example, not only will you pay almost $30 less each month, you’ll also save over $1,700 over the length of your loan.
Want lower monthly payments
There are several ways to lower the monthly payment for your car loan when you refinance. Securing a lower interest rate can lower your payment along with extending out your loan period over more months.
This option will generally require that you pay more in interest over the length of your loan, but since you’re paying over a longer period, your monthly payments are lower.
When your credit has improved
Your credit has a significant impact on your auto loan terms. If your credit has improved since you were approved for your original loan, you can apply to refinance it.
With a better credit score, you may be able to qualify for a lower interest rate, extend your loan over a longer period, and more. In general, better credit gives you more flexibility with your terms which allows you to secure the loan you want instead of settling for the one you can get.
When to Avoid Refinancing Your Car Loan
Going through the car loan refinance process isn’t for everyone at every stage of life. There are times when you should avoid refinancing your car loan because it might be difficult to qualify or because it won’t provide enough of a benefit. Here are a few examples.
When you’ve paid off most of your loan
While you might be able to secure a lower interest rate or lower your monthly payment through a refinance, if you’ve already paid off the majority of the loan, it might not be the best choice. Instead of changing your loan terms, it could be in your best interest to pay off your car and avoid another hard hit on your credit.
When you’re underwater on your loan
If you owe more on your vehicle than it’s worth, refinancing it might not be the right choice. Many lenders avoid refinancing in this situation, so you should consider paying off more of your loan until you’re no longer underwater, then apply for a refinance in the future if you believe it’s still a good option.
When your vehicle is older
Depending on the age of your car, lenders might not want to refinance your loan. The older the vehicle, the more of a risk for the lender because it’s likely unreliable. So, if your car is already older or has high mileage, you might want to stick with your current loan and avoid looking for a lender who will refinance.
Even if you do find a lender, consider keeping the term shorter, because the last thing you want is to be making payments on a vehicle that no longer runs well due to its age or high mileage.
What You Need To Refinance a Car Loan
If you find that refinancing your car loan is in your best interest and you’re ready to move forward, here are some of the things you’ll need to complete the process.
Keep in mind that all lenders are different and might require additional documentation.
- Proof of Income: Your lender may want proof that you can afford to make your loan payments. You will likely need to provide your recent pay stubs, W2s, or 1099s.
- Proof of Residence: Your lender may want proof of where you live in the event you fail to make payments as agreed upon. You can provide evidence in the form of your license, a major bill, medical policy, etc.
- Proof of Insurance: Your lender will want to verify that you have the minimum required insurance on your vehicle. Typically, showing your insurance card is enough.
- Vehicle Information: Your lender will want all the information on your vehicle. Be prepared to provide your vehicle registration card, which should have all the necessary information.
- Current Loan Details: Your lender will be paying off your existing loan during the refinance. You will want to provide a 10-day payoff amount and a statement that shows the account number for the loan, so they know how much to pay and what company receives it.
Is Now The Right Time to Refinance Your Car Loan?
If you’re ready to refinance your car loan and save on your monthly payment or reduce your interest rate, we can help.
At Fort Lee Federal Credit Union, we offer flexible financing with flexible terms on vehicles up to seven model years old. You can finance up to 125% of your loan so you can finally get the loan you need and deserve.