Car loans have been taking more out of people’s paychecks than they can afford. They have been wondering, “If they find out how to refinance a car loan, would it save them money?”
Now is a great time to ask this question because interest rates are so low now. To ensure that this will work out for the best, borrowers need to do it the right way.
Three Benefits of Refinancing a Car Loan
When someone refinances a loan, he borrows money from another lender that he will use to pay the loan that he has with his first lender.
Doing this offers people at least three benefits, including the following:
-
Your Interest Rate Will Be Lower
Interest rates are very low right now. This means that refinancing can be highly beneficial to many people right now. For example, the interest rate that a borrower has may be high for several reasons. First, if a borrower has a higher credit score than she had when she financed her vehicle, it might be worth it to refinance her loan to receive a lower interest rate.
-
You Are in a Better Financial Situation, and You Can Afford a Larger Payment
Choosing a longer term of 72 or 84 months provides borrowers with a lower monthly payment. If they can refinance right now, they will have a larger payment, but they will receive a lower interest rate for a shorter term. This means that the borrower pays less in interest over the life of the loan in a shorter amount of time.
-
Borrowers Can Choose to Make Twice Monthly Payments
If a borrower makes a payment with every paycheck, this reduces the money paid in interest. It also means that he will repay the loan in a shorter period than he would have repaid the original loan.
The Main Benefit of Refinancing a Car Loan
According to Lantern Credit by SoFi, “The best reason to refinance a car loan is to obtain a lower interest rate.” For example, the borrower may have applied for a $25,000 car loan. She decides to refinance her loan with a new $21,000 loan. The term for the new loan will be 60 months, but the interest rate will go from 7% to 5%. This means savings of approximately $6,000 over the life of the loan.
Ask Three Questions before Refinancing a Car Loan
Borrowers must ask the following three questions before they apply to refinance their car loans:
-
Did Your Credit Score Go Down?
If a person’s credit score is too low to be approved for a lower interest rate, now is not the time to refinance.
-
Is It Too Late to Refinance a Car Loan?
If a borrower has been paying for several years, most of the principal and the interest may have already been paid. Therefore, now wouldn’t be a good time to refinance.
-
Do You Have to Pay a Prepayment Penalty to Pay the Loan in Full Early?
Prepayment penalties are rare, but if one exists, the borrower needs to make sure that paying this penalty would be worth it to refinance the loan.
Refinancing a car loan can help you improve your finances by lowering your interest rate and shortening your loan’s terms.