More than likely, your auto loan will be your biggest monthly payment after your mortgage or rent payment. That's why making sure you have the best possible loan terms for your financial situation is key. Decreasing your interest rate by just one percentage point can save you valuable money. In many cases, refinancing is a simple process that is well worth your while. Check out the tips below to know when a good time to refinance is.
Decrease in market interest rates
If interest rates on auto loans have decreased since you took out your loan, refinancing can be a wise choice for you. You can lock-in today's lower interest rate and stop paying the higher rate you had agreed to when you initially bought your car.
Increased credit score
Borrowing money is more difficult when you have a low credit score. If you got your auto loan several years ago when your credit score was low but you have been making all the payments on time, you may be surprised to learn how much your score has improved. You can use your new and improved credit score to qualify for lower interest rates on a refinanced auto loan.
Barely making payments
Refinancing can sometimes be a good idea if your financial situation has deteriorated since you bought the car. If you find you are barely making the monthly payments, refinancing with a longer loan term can decrease the monthly payment amount. This gives you some wiggle room in your budget to help you stay on track with making each payment on time and protecting your credit score. However, note that a longer loan term typically means you will pay more in total interest over the life of the loan.
Lease purchase conversion
Many leases have the option to convert to purchase agreements when the lease expires. However, the terms on these loans may not be the best because you got your lease several years ago. It may pay to refinance the amount you need to borrow to purchase your car after the lease expires.
Tips for a smooth auto loan refinance
Once you have decided you are going to refinance, start by shopping for interest rates. Your local bank and credit union often provide competitive rates, especially if you already have accounts open with them. Don't forget to also call your current lender to ask if they can lower your interest rate.
When you are ready to refinance with a particular lender, make sure you understand all the terms of your loan agreement. You should know what your monthly payment amount is, what day of the month it is due, how to make your payment, and when your auto loan will be completely paid off. Once you are comfortable with all of those details, it is time to sign the paperwork and finish the process of refinancing your auto loan.