You Credit Score Has Increased
Your credit score is essential because it’s what lenders consider most before agreeing to lend you money. The approval of your application, the loan amount, the APR, and the repayment terms are dictated by the credit score. Hence, a high credit score means low APR and a low credit score means higher APR.
If your credit score has improved since you took out your first auto loan, then your odds of qualifying for a better auto loan deal increase. Consider checking your credit score before applying. If your score is low, try improving it by making timely payments on current debts.
You Need A New Loan Term
After your credit score, the next thing to focus on is the loan term. Refinancing the car loan is reasonable when you’re looking for a moderate monthly payment. By extending the loan repayment term, you would have the option to lessen the regular monthly payment. However, the total interest amount that you’ll pay over the life of the loan will also increase.
Alternatively, you can opt for a shorter repayment term which will increase the monthly payments but will also lower the APR.
The Current Loan Rates Are Low
The best time to look at refinancing a car loan is when the rate of interest is lower compared to the time you first got the car. For example, if you purchased your car in 2018 or 2019, then this is the right time. This is because the interest rates in 2020 have declined to a great extent.
Even a minor change in rates can help in saving a good amount of interest. If you meet the criteria and aren’t upside-down on your current loan, refinancing when the rates are the lowest will definitely help you save a lot of money.
You Want Smaller Monthly Payments
Have the monthly payments started moving out of your budget? Refinancing would be the right decision if you’re looking to reduce the monthly payment for the car loan. Refinancing the loan will help you with longer terms and reduced rates, indirectly reducing the monthly payments.
For instance, you owe $20,000 at 6% for 36 months. This means that your average monthly payment is $608. Now, let’s say, you’re eligible to refinance this amount at the same rate for 60 months. By doing this, you’ll be able to bring your monthly payments down to $387 per month. However, this also means that you’ll end up paying around $2,000 additional in interest over the life of the loan.
You Aren’t Upside Down On Your Current Loan
New cars are obligated to lose nearly 20% of the original value in its first year. If you owe more than your car is worth, then it may be difficult to find a lender that’s willing to work with you.
Some lenders also won’t agree to refinance older cars. Hence, if you have a new car that still has adequate resale value, it could be an ideal opportunity to refinance.
Things You Need to Apply for Refinancing
To be able to get quicker approvals on your refinancing application, here are the things you must do:
- To refinance the car loan, you’ll need to collect all the required documents. This includes identity proof, income proof, address proof, driving license, and so on
- Compare the different refinancing options available in the market
- List down the multiple lenders and their plans
- Compare the terms, APR, fees, penalties, and payment amount. Then choose the best one that fits your budget
- Look for lenders that help with pre-qualified auto loans
- Apply, get qualified, and accept the terms and conditions of the lender to finalize the loan plan
The Impact of Refinancing On Your Credit Score
Whenever you look for a loan, the lender will first inquire about your credit score and credit history. As per FICO, any inquiry regarding your score will lower it by a few points.
When multiple inquiries regarding your score are made, it’ll negatively affect it. However, if you’re applying for multiple auto loans within 14 days, it’ll count as a single inquiry at the time of calculating your credit score. Therefore, the multiple inquiries will have a zero impact on your credit standing.
Bottom Line
Refinancing your auto loan can be a good idea depending on the situation. While refinancing your current auto loan, make sure you work on all the reasons, conditions, and options. Consider your credit score, check out the costs, and be aware of the drawbacks before applying.
