With rising prices and inflation, you may be breaking a sweat and pinching pennies to stay ahead on your finances. But it doesn’t have to be that way. You can save money using a number of strategies. If you have car payments, for instance, one creative way to save is to refinance your car loans at the right time and with the right lender.
There are many benefits to refinancing your car loans for better terms. We have some tips, tricks, and strategies to help you secure the best rates and the most favorable terms possible. Here are some insights on the benefits of doing a car loan refi and how to plan it at the exact right time.
Lower Your Interest Rate
Securing a better interest rate is one of the main incentives for doing a car loan refinance. Perhaps market conditions were unfavorable at the time you originally purchased your car. If so, rates may have dropped in the time since. Even the difference of a single percentage point could save you hundreds of dollars a year, depending on the loan amount.
What if interest rates have gone up since you bought your car? Are you just out of luck? Not exactly. Your interest rate is also based on other factors, such as your creditworthiness. If you’ve improved your credit score in the time since you closed on your auto loan, you may qualify for a better rate now than you did previously. Check your credit score to find out where you stand and determine whether it’s a good time to do a refi. Some banks and credit cards allow you to check your credit score free of charge.
Reduce Monthly Payments
Sometimes we’re cruising down the street, enjoying the view, when suddenly we hit a road bump. Life works much the same way. You may be doing great when, all of a sudden, something unexpected happens—a job loss, family illness, or some other unforeseen life emergency.
Next to your rent or mortgage, your auto loan is likely to be one of your most costly expenses. If you’re looking to reduce your monthly costs, you may want to refinance your auto loan for a longer loan term. By extending the repayment period for your car loan, you can typically lower your monthly loan payment.
Keep in mind that extending your loan term means you’ll likely spend more money over the life of the loan. Since you’ll be paying down the principal over a longer period, you’ll pay more in interest, and the loan will wind up costing you more in the long run.
Of course, if you expect your financial situation to improve at some point and you’re able to avoid a prepayment penalty, you can always increase payments later and pay off the loan more quickly. Weigh the risks and benefits before deciding to extend your loan term.
Shorten the Loan Term
On the flip side of extending your loan term, you could also shorten it. Perhaps you qualify for a better interest rate now and the additional cost savings mean you don’t need to spread the loan out over quite as many payments. You can opt to refinance for a shorter loan term so you can pay off the loan more quickly and save on overall interest.
For instance, you may have 43 monthly payments remaining on your loan when you decide to do a refinance. Instead of opting for a 4-year loan term at 48 months, which would extend your loan, you may decide to opt for a 3-year term at 36 months instead.
Opting for a shorter loan term will free you from your debt obligation sooner, minimize the total interest you owe, and reduce the likelihood that your car depreciates in value to the point that you owe more on it than it’s actually worth. A shorter loan term can save you money while also reducing your risk of carrying negative equity.
Follow Best Practices
Shop Around
Securing a great interest rate can save you money and put you in the driver’s seat of your financial journey. So shop around refinance car loans by comparing interest rates and finding out exactly how much money you could save. The trick is to do your shopping within a short window of time.
Since comparing rates to find the right loan is encouraged, if credit inquiries are made within a short time span (usually a few weeks), the FICO Score and VantageScore systems will treat multiple inquiries as a single inquiry.
Keep in mind, though, that when you close on a new loan, your credit score may initially drop a bit. That’s because new debt is considered more of a risk than established credit. However, once you begin to make on-time payments, your score will likely go back up.
Factor in Fees
Lowering your interest rate is a top priority, but before you sign on the dotted line, you should also factor in and compare the potential fees involved.
Does your current lender charge a prepayment penalty for closing your loan early? Since a refinance repays your original loan before issuing the new loan, you should double-check whether you’ll be assessed a prepayment penalty and how much it’ll cost.
Lenders are prohibited from charging a prepayment penalty on auto loans that have been open for 61 months or longer. If you’re nearing that mark, it may be worthwhile to wait it out before refinancing to avoid paying the prepayment penalty.
Some lenders charge origination fees for new loans. Ask about this as well and whether any other fees will be assessed. If doing a car loan refinance is going to cost you money in closing costs, crunch the numbers to determine whether the cost savings outweigh the initial expense.
If your new lender charges an origination fee or prepayment penalty, ask if both or either can be waived. At the very least, check if the fees can be reduced. After all, the whole point of refinancing your auto loan is to save money. So find out if your lender is willing to work with you.
Which leads us to our next pro tip …
Choose the Right Lender
A low interest rate can be an excellent motivating factor when shopping around to refinance car loans, but we recommend going a step further. You should also compare lenders.
Saving money and getting your finances in order can be made easier by working with the right lender. Consider working with a local credit union for the best benefits. Local credit unions, such as Mid-Hudson Valley Federal Credit Union, typically offer competitive rates and terms. They also provide quality service personalized to your individual needs, perks and discounts just for being a member, and valuable financial resources, such as financial coaching, credit report reviews, and educational modules.
When you think through your options, choose your lender wisely, and time your auto refi just right, you can expect a much smoother ride toward achieving your financial goals.