Tips on Refinancing Auto Loans
Tips on Refinancing Auto Loans
Tips on Refinancing Auto LoansRefinancing an auto loan at a lower interest rate can be easier than refinancing a home mortgage. For one thing, there is no appraisal involved and the loan processing fees are nominal. Auto loan rates are competitive, so it pays to inquire about the rates offered by different lenders. In fact, according to an article published in USA Weekend Magazine, most credit unions do a lot of their business refinancing auto loans. However, consumers should also check out the rates of online lenders and those of traditional lenders before refinancing a loan.
Save Money
One of the primary reasons why consumers refinance car loans is to save money. It may be to your advantage to pay off your car loan so that you can refinance the loan to get a lower APR. Sometimes because of lower credit ratings, some individuals must take out a car loan at a higher interest rate. But once you have improved your credit score, chances are you can refinance your car loan, paying back less interest and lowering your monthly car payments at the same time. Better yet, you can pay off your car loan sooner by continuing to pay the same amount of money each month even though the payments have been lowered. This allows you to pay down the principal on the loan faster.
Lower Interest Rate
Refinancing your car loan at an interest rate of just 1 percent less than you are paying can save you money over the duration of the loan. Imagine how much you can save if you can refinance the loan at an interest rate several percentage points lower than what you were offered when you first took out the loan. One possible catch is that you may have to apply for a loan with another lender. The good news is once you have established that you have been making your payments on time for at least six months, another lender is more likely to be willing to take a chance on you.
Value
Most lenders will not give you a loan for more than the vehicle is worth because the car itself is the collateral for the loan. Generally, lenders will not refinance an auto loan unless you still owe at least $7,500 or more. Before you begin looking to refinance your auto loan, find out the value of your car. After rating the condition of your vehicle, check the latest Kelley Blue Book used-car values (see Resources below). Keep in mind, though, that lenders do not make auto loans based on the value of the car but rather on how much you still owe on the original loan.
APR
Even if you had bad credit when you first financed the vehicle, if you have improved your credit score, you should be able to get a lower APR than you are paying now. You may not qualify for the lowest auto loan rates available, but you can still save money with a lower interest rate and have lower monthly payments.
Prepayment Penalties
Before going to another lender, talk to your current lender first. If you have a good payment history, the lender may be willing to reduce the interest rate on your car loan. Providing the lender agrees, you may be able to save yourself some time as well as money. However, if you must go in search of a better interest rate, find out if your current lender charges any prepayment penalties or else the payoff may cost you more. Since in most cases the majority of the interest on an auto loan is paid during the first half of the term of the loan, the earlier you pay off the loan, the more money you may be able to save. Be careful, as some loans are set up so that you are required to pay back the full amount of interest in addition to the balance of the principal owed even when you pay off the loan early.
Warning
While the interest rates for used car loans can be higher than those available when you buy a new car, for auto buyers who do not qualify for the 0 to 3 percent interest rate often offered by auto manufacturers, refinancing your car loan may get you a lower rate than you are paying now. Refinancing your auto loan can save you hundreds or even thousands of dollars depending on how much of an interest rate reduction you can get.
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