When you hear the term “refinancing,” you probably picture a large house with a picket fence, a spacious yard, and a broken sink that needs to be repaired with the extra money. But it doesn’t just apply to real estate. People refinance their cars all the time, and while it’s not always the best course of action, there are a few practical reasons to refinance that reliable but expensive sedan or SUV.
The reasons for refinancing a vehicle aren’t unlike the reasons for refinancing a home. More often than not, you’re looking to secure a better interest rate and ensure that you’re getting the best deal in light of the current marketplace. Thankfully, refinancing a car is actually easier and requires less paperwork than refinancing a home. If you’re curious, read on to discover what the savviest car buyers already know.
Reasons to Refinance a Car
If you’re interested in refinancing your car, the process is as simple as finding a credit union or other lender that purchases car loans. If you have reasonably decent credit, you should have no trouble finding such a lender. Ideally, you’ll want a credit score of 700 or higher, but you may still be able to secure decent refinancing terms if your score is a bit lower.
Just search online and compare your options. The only real question is whether or not refinancing is in your best interest. If you can secure a better interest rate than what you’re currently paying, refinancing is almost certainly in your best interest. Before you start applying for refinancing, though, it’s important to consider whether the conditions are in your favor.
Reason #1: Your Credit Has Improved
Consider the following scenario: You purchased a car in 2015. At the time, your credit score was 520. The dealership agreed to finance a loan on your behalf, but they would only offer you a minimum interest rate of 18%. Now fast-forward to 2018. You’ve gotten your student loans out of default and paid off your back taxes, and your credit score now stands at a respectable 660. As a result, you discover that you can now refinance your vehicle with another lender and get your interest rate down to 9%. It seems like a no-brainer that this would be an excellent opportunity to pursue.
Reason #2: Interest Rates Have Fallen
The U.S. economy is a fickle thing, and interest rates have a tendency to rise and fall despite your personal input. So let’s say that—with a stellar 740 credit score—you purchased your vehicle at 6.75% interest, but the market now affords you the opportunity to finance at only 4.25% interest. On a $20,000 car, you could potentially save more than $1300 over the life of the loan by refinancing, assuming a finance period of five years.
Reason #3: You Financed From an Unfavorable Lender
In some cases, you may have good credit and a good economy on your side. Nevertheless, not all lenders are created equal. If you’re lamenting the fact that you hastily shook hands with a slippery lender who duped you into a less-than-favorable interest rate, do some research. You may be able to refinance with a more favorable lender and reduce your overall burden. Compare your car refinancing options online, and see if you can save some money on your loan.
How to Refinance Your Loan
If you’ve done a bit of research and determined that you could save money on your loan, the next step is to contact your current loan provider and determine exactly how much you still owe. This is the amount you’ll need to refinance. Don’t worry if you’ve already made a significant number of payments. It’s never too late to start the refinancing process. Granted, younger loans can result in more significant lifetime savings, but anytime is a good time to compare your options.
Companies from Bank of America to Capital One offer car refinancing options, so compare your options and discover what works best for you. You may find that you’re paying way too much for your car loan.