When someone is looking into refinancing a car, there is always a financial reason behind the decision. They are usually looking for lower monthly payments to improve monthly cash flow, reduce interest rates to lower the overall amount that will be paid over the life of the loan, or to help pay off debt by consolidating multiple smaller debt obligations.
Most auto loans are between 60 – 72 months in length. Consumers should research and do the math on their loan options to find out if refinancing is the wisest choice. One of the biggest things people overlook is an early payoff penalty. Contact your lender and ask if there is an early payoff penalty. A penalty doesn’t necessarily mean that you shouldn’t refinance. Again, do the math. If you will end up saving more by refinancing than the cost of the penalty, then you can proceed to the next step in your decision process.
Debt Free Living: If you are on a path to leading a debt free life, and simply want to pay off your existing loan faster and you already have a good loan rate, then the best option is to make larger payments or multiple payments each month. Beware that some lenders require you to call each time you make that larger payment and request that the additional funds be applied to your principle balance that day, not toward the next payment when that payment is due. Otherwise, the additional funds will be reserved to go toward the next payment you owe and you will not benefit from your hard work of attempting to pay off your loan early.
Refinancing for Other Expenses: Perhaps you need a lower monthly payment to free up cash for other expenses. Whether those expenses are needs or wants is irrelevant. Personal finance is just that. It’s personal. Meaning, one person may want more cash flexibility to put more money in their 401K while another person might want to have more cash for entertainment expenses. The end goal is the same. Refinancing can free up cash for other things.
Refinancing to Reduce the Long-term Cost of the Loan: Most people only look at the amount they will have to pay each month to decide if they can afford the car loan payment each month. However, if you are really money savvy and understand interest rates, you know that having a lower interest rate may save you a lot of money over time. For instance, if you finance $27,500 over 70 months with a 4.5 percent interest rate, by the time you pay off the loan you will actually have paid $31,318. That’s a difference of $3,818. It’s money you could have invested, put in your savings account, or taken a little vacation with. If your credit score has gone up significantly, you may be able to get a better loan rate which in turn will lower the amount that you are paying to finance the loan. If you finance that same $27,500 at 3.10%, the amount you will end up paying over the principal amount is reduced to $2,597. Not only will your monthly payment be reduced, but the amount you will pay over the life of the loan is also reduced. Beware that there are fees associated with getting the ball rolling on a loan. If the fees are equal to or greater than the amount you will save by refinancing to a lower rate, the best option, from strictly a dollars spent vs. dollars saved perspective, would be to leave the current loan as is.
Refinancing to Pay Off Debt: It’s a bit of a misnomer to state that a consolidation of debt is “paying it off.” You have in reality, paid off several lenders but gone back into debt with a usually a different lender. The debt is still there and you still have to pay it back. However, consolidation generally allows you to make one manageable monthly payment which hopefully even has a lower interest rate than you previously had. If you have lots of little loans eating up your debt to income ratio and making it difficult to achieve other goals such as buying a house, consolidating a car loan with other debt can be beneficial.
When to Refinance: If you are thinking about refinancing, make sure the conditions are right. The Federal Reserve has kept interest rates really low for the last 2 to 3 years so if you took out a loan prior to that, chances are you’ll be able to get a lower rate if everything else in your credit report has remained the same.
If your credit score has improved since you took out your loan, it doesn’t hurt to make a phone call or two to find out if that better credit score can launch you into a better loan rate.
If you didn’t have a lot of cash for a down payment the first time around, that could have affected the rates and terms of your loan. Talk to a loan specialist at ASCU to see if they can get better rates and terms for you to help you achieve your goals.