Auto loan refinancing isn’t always a good idea. Sometimes, it offers consumers a lower interest rate and lower monthly payments, but this is a matter that needs to be carefully considered before moving forward. According to Lantern by SoFi, ”Refinancing your car loan can lower your interest rate and save you hundreds and even thousands of dollars over the term of your loan.”
Consider the following before committing to refinancing a car loan:
What Are the Lender’s Refinancing Requirements?
Before people decide to refinance a car loan, they must know what their lenders’ refinancing requirements will be. Then, consumers will need to use an auto loan refinance calculator to find out if refinancing would be worth the cost.
Are there Prepayment Penalties?
Some lenders require borrowers to pay prepayment penalties early for paying off their loans. However, if the prepayment penalty will be significantly less than the savings, refinancing is a good plan.
Is the Interest Rate Going to Be Significantly Lower?
If a consumer can qualify for a significantly lower interest rate than the original loan’s rate, refinance would be a good plan. However, if the interest rate is the same or higher, it is not a good idea.
Is Your Credit Score Higher than When You Applied for Your Original Loan?
When people purchase a vehicle for the first time, their credit scores usually aren’t very impressive. Some time has passed, and a consumer’s scores could be much better. If they are, refinancing would be advantageous because the consumer can qualify for a lower interest rate.
Is Your Monthly Income Lower than It Was When You Applied for the Original Loan?
If a consumer is earning less money than when he applied for his auto loan, refinancing could help lower his monthly payment. Then, he will lower his risk of getting into serious financial troubles.
How Long Are Your Loan’s Terms?
If consumers refinance their loans, they will also extend their terms. Their payments will go down, but the amount of interest they will pay over the life of the loan will increase. To be advantageous, consumers would need to refinance into a loan with a lower interest rate and shorter terms. This lowers the amount of interest paid over the life of the loan.
When Should You Refinance an Auto Loan?
After determining that the lender’s requirements are beneficial, consumers need to decide if this is the right time to refinance by asking the following questions:
Do You Have a Significant Payment History?
Before people can refinance their auto loans, they must establish a repayment history first. In most cases, the consumer must have repaid the loan for a year if it is the consumer’s first vehicle. For example, someone with a more extended credit history may look into the possibility of refinancing after about six months.
Are Interest Rates Lower?
Financial institutions lower their interest rates when the Federal Reserve lowers interest rates. For example, if a consumer purchased a vehicle when interest rates were pretty high, it’s time to refinance now that the Federal Reserve recently lowered interest rates.
Use Lantern Credit’s auto loan refinance calculator to determine how much money you could save by refinancing your auto loan.