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If you count yourself among the 44% of Americans who rely on auto loans to finance their vehicles, it’s important to pay attention to the fine print terms of your loan. What type of interest rate are you paying? Do you know your payoff terms? These are the details that many drivers overlook or sacrifice in order to get behind the steering wheel.
The good news, at least, is that you don’t have to be stuck with an awful interest rate or unfair loan terms for the next 60 months. Refinancing could be the quick, easy financial tool you need to secure a lower interest rate and monthly payments that don’t cause you to break out into a cold sweat.
When Is It Best to Refinance?
Refinancing is a tool that changes the terms of your auto loan agreement, such as the interest rate and monthly payment. Since it offers such significant benefits, refinancing isn’t available to every borrower. You need to qualify for refinancing, just like you qualified for your original auto loan.
If you meet most of the qualifications below, you have better odds of getting approved for refinancing your auto loan:
- Your credit score has improved (aim for high 600s or above)
- You’ve made six to 12 months of on-time car loan payments
- You have a consistent income to demonstrate the ability to pay your debts
- Your debt-to-income ratio is relatively low (less than 20% is excellent)
What are the Benefits of Refinancing Your Loan?
Refinancing is a powerful tool, especially if you’re currently paying way too much for a high-interest rate.
Locking at a lower interest rate carries significant benefits. There’s the first and most obvious benefit of saving money: You’ll pay $3,683 in interest alone on an auto loan of $15,000 with an interest rate of 9%. Refinancing to a 4% interest rate cuts your interest costs by more than $2,000! Just imagine the breathing room that it creates in your budget.
This lower interest rate offers two potential benefits. First, you can enjoy a lower monthly vehicle payment and apply your savings to other important expenses, such as student loans or your mortgage. On the other hand, you can pay more than what’s due each month to accelerate your loan payoff. Since you’ll have a lower total interest cost to contend with, it’ll be easier to conquer your auto loan debt.
Are There Any Downsides of an Auto Loan Refinance?
While the benefits of refinancing speak for themselves, there are a few potential downsides to consider. First, your lender may require you to pay refinancing fees. These fees are impossible to predict since they vary by lender, but some fees are so high that they nullify your lower interest rate savings.
You may also pay more interest over the life of your auto loan if you opt to extend your loan term. For example, if you refinance to extend your 36-month loan into a 60-month loan, you’re forcing yourself to pay interest for 24 additional months. That adds up!
Here’s the proof: a $10,000 loan with a 20% interest rate over a 36-month term charges $3,378.89 in total interest. Refinancing those same loan terms over 60 months costs an additional $900 in interest. Depending on your priorities and financial situation, this may or may not be a sacrifice worth making.
Regardless of your auto loan situation, you can always save money on car insurance like EverQuote. Intelligent technology (no forms to fill out so the system can instantly check for a better deal in 30 seconds) and personalized advice will help you find the perfect insurance plan at the lowest price. Now that’s some good news for your wallet.
Read More: Your Car Could Be Costing You Thousands Every Year. Here’s How To Save.
