With interest rates being lower than they have been in a while, you might think now is a great time to refinance your auto loan. Many people know how to refinance their mortgage, but auto loan refinancing is a service that surprisingly few people take advantage of. Many of the reasons people do not refinance an auto loan is because they think it is too much hassle, or that the term of the loan is too short to make a difference. Both of these assumptions are false, and refinancing an auto loan can be as simple as calling your lender.
What Does It Mean to Refinance an Auto Loan?
Refinancing is the act of either amending or completely changing a loan agreement with a lender. Often times, the remaining outstanding principal balance will remain the same, but your interest rate and terms and conditions could be changed. Generally, you will not want to refinance unless it is in your favor to do so.
Why Should I Refinance?
There are several reasons why you might want to refinance. The first and most common reason that people will refinance any type of loan is a change in interest rates. Let’s say that your original interest rate was 4 percent for your auto loan. If the prevailing interest rate has now dropped to 2.99 percent, you will want to refinance your loan to change your rate. This will reduce your interest payments.
Another reason that you might want to refinance is that the rate the dealer gave you when you purchased the car was above the market interest rate. This happens more often than you should. Banks and lending agencies will sometimes offer dealerships incentives to increase the rate for your auto loan. For example, if the market rate is 3 percent, but the dealer offers you 4 percent and you take it, the bank might offer a portion of those interest proceeds back to the dealership. You should always check the market interest rates when you are buying a new car. However, if you were charged an above-market rate by the dealership, then you can refinance to lower it.
Another reason to refinance your auto loan is that your credit score has improved. Many people buy their first car when their credit is relatively new. If you want a couple of years for your credit score to increase, you can probably refinance your loan. Since the lending agency will now view you as more “creditworthy,” you might be able to get a lower interest rate on your loan.
The final reason that you might want to refinance your loan is that you are no longer able to keep up with your car payments or your personal financial situation has taken a turn for the worse. There were a lot of people scrambling to refinance their loans during the recession in 2008 and 2009 because they were no longer able to keep up with their payments. If this is the case, you can go to your lender and ask for either a lower rate or new terms on your loan. If your financial situation is bad, they may be hesitant to lower your interest rate. However, if offering you an additional 12 months on the loan (and lowering your monthly payments in the process) will ensure they get their money, the can be very receptive to a term negotiation.
How Can I Refinance?
If you are going to refinance your loan with your current lender, you can just call or E-mail them asking to refinance your loan. You should do your research before contacting them so you can come in with the prevailing interest rates and standards for auto loans. This will keep them from trying to up-charge you on interest in the end.
If you are going to refinance your loan with a different lender, you should set up an appointment with that lender as soon as you can. It is good to get to know the lender before you do business with them. You can try to find a branch office and let them try to sell you on their bank or lending institution. Make them tell you why you should refinance your auto loan with them. This will often lead to lower rates and better terms in the long run.
Refinancing Can Lead to a Better Financial Situation
Refinancing your auto loan can help you get to where you want to be in your financial future. Getting the appropriate terms and interest rates for the times is something that is extremely easy to do, and there are very few downsides to refinancing any type of loan. Overall, refinancing is an easy strategy to financial independence.