Months have passed since you brought home your current vehicle from the dealership. At the time, you agreed to the interest rate and term you were offered because you were keen to finally own that dream car. But a lot has happened since then, both in your personal finances and the overall market. What may have been your best — or only — option at the time may now pale in comparison to the opportunities in front of you today. If you refinance your automotive loan, you could save some money that you’d otherwise be losing on a high interest rate.
The potential benefits of refinancing
Refinancing an automotive loan involves replacing your current loan with a new loan for the same item but from a different financial institution at a different interest rate. As Philip Reed of NerdWallet explains, “The prospect of paying less interest or lowering your monthly payments are the main reasons to consider refinancing.” Despite an initial credit score hit for applying, a loan refinance can save you money in the long run as you pay less in interest and either retain more money or put more toward the principal.
Should you refinance your loan?
A lot of people benefit from refinancing an existing loan — automotive or otherwise — but it’s important for you to evaluate your own situation before jumping on the bandwagon.
Evaluate your current credit score in comparison to what it was when you obtained the loan. If it’s been a while since you opened a new line of credit and you’ve been diligent in paying all your bills on a monthly basis, you probably have a higher credit score now than you did at the onset of the auto loan. Barry Bridges of Bankrate says this gives you the chance to receive a new replacement loan at a lower interest rate that reflects your trustworthy credit score. If your credit score has gone down in that time, you may be better off keeping your current loan.
Bridges also points out that if the Federal Reserve has dropped interest rates since you initially took the loan, you could save money by refinancing at the new, lower rate. Consider too how much time you have left on your current auto loan. If there’s only a year or less left until the repayment schedule ends, it might not be worth the time, fees and hit to your credit score to apply for a new loan.
How to find a better deal
If you’re interested in refinancing your auto loan, you need to make sure you do your research. If you took the financing offer given to you by the dealership, it probably had a higher markup than what you could have received at other lending institutions, according to Credit Karma. Contact banks, local credit unions and online lenders to see what their current lowest interest rates are for car loans and see if any offer a better deal than what you have at the moment.
If you find an opportunity for a better interest rate on your auto loan, it’s sometimes worth the time and cost to refinance the loan, especially if you bought an expensive car that’s costing you a lot each month.