What is Refinancing?
In simple terms, refinancing involves paying off an existing loan with a new loan that offers the customer better interest rates and more favorable terms.
An auto refinancing loan is a secured loan, wherein the car is used as collateral to secure the loan.
It features a fixed monthly payment (ideally lower than the current loan) and duration.
Refinancing is the best option when you get a good opportunity to access an interest rate that’s lower than what you currently pay.
The logic is simple – with a lower interest rate, you’ll be able to clear off the loan faster and save money in the process.
How do You Save Money on Refinancing?
Refinancing involves a straightforward calculation. Let’s say your current loan of $20,000 is fixed for 5 years at a rate of 5% interest (APR).
This means, you will pay approximately $377 per month, which amounts to $22,645 (principal + interest) over the life of the loan. Hence, the total interest over a period of 5 years is $2645.
Now, if you refinance the loan at an interest rate of 2.38%, your total interest for the same tenure stands at $1233.
Accordingly, you can save $1,412 on interest over a repayment period of 5 years.
Eligibility for Obtaining an Auto Refinancing Loan
There’s no set minimum time period before you can apply for the refinancing of an outstanding auto loan.
You can apply for refinancing even before making the first payment of your current loan.
Still, there are certain eligibility requirements that need to be satisfied before your application can be approved.
In certain cases, you might need approval from your current lender.
Moreover, you may also need to wait until you receive the registration documents from your state’s Department of Motor Vehicles. Other than these two exceptions, here are some common requirements –
- Complete details of your current loan (lender, loan account number, loan balance, etc.)
- Documents and details of your vehicle (model, VIN, brand, etc.)
- Income & employability statements
- Social Security Number (SSN)
- Proof of address
- A good credit score
When Should You Consider Refinancing?
There are many reasons to consider refinancing, but chief among them is saving on monthly payments or extending the duration of an outstanding loan to lower repayments.
Here are some common scenarios when considering a refinancing can turn out to be the right choice –
Lowered Interest Rates – Interest rates on consumer loans rise and fall periodically.
Keep an eye out on the market trends, and when lower rates come around, be prepared to act.
Dip in Your Income – If you’re having difficulties managing your finances, refinancing can give you some much-needed breathing room.
Lower payments will help you better allocate funds.
Increased Credit Score – If your credit score is below par, there’s no point taking a further hit on it.
Yet, if your score has increased since the initial loan approval, go ahead and apply for refinancing.
With a better score, chances are that you’ll receive quicker refinancing approval at competitive rates.
Your Car has a Good Resale Value – Most new cars lose out on 20% or more of their cost price in the first year itself.
If your car has a good sale price, it’s easier for you to get a lender to agree to refinance your loan.
Your Existing Loan is New – The whole point of refinancing is to save money.
If you’re 75% into the set repayment duration, refinancing might not be an ideal choice.
Still, if the loan is less than a year old and you can access a better rate, it’s worth acting fast to realize the savings.
When Should You Not Refinance?
If you have an older car (make, model), you shouldn’t opt for refinancing.
Most lenders have limits on how old a vehicle has to be in order to qualify for the loan.
You should also not consider refinancing if you already owe more than the car’s current value or are very close to the end of the term.
Refinancing an outstanding auto loan, in most cases, leads to a very beneficial outcome when it comes to reducing monthly auto loan payments or extending the duration of a loan.
Still, depending on your circumstances, the life of the loan, and interest rate, do your homework before selecting the best choice.
Use the tips listed above and make sure to do the calculations before refinancing your auto loan.