One of the simplest ways to lessen the squeeze of a tight budget is to reduce spending. However, if fewer trips to your local barista and canceling your cable TV sports package aren’t having the budgeting impact you’d like, consider another option. An auto loan refinance can put more than just a few extra dollars in your wallet each month. Auto loan refinancing can save you hundreds of dollars in the long run.
Before you refinance your auto loan, here’s what you need to know.
What is an Auto Refinance?
An auto refinance is the process of obtaining a new auto loan to pay off your current one. The prospective lender will pull your credit as part of the application process. As with the original loan, the vehicle is used as collateral for the new loan. New terms and a different interest rate usually accompany an auto refinance.
If approved, the extent to which the new loan will affect your credit score depends on how the loan is reported to the major credit bureaus: Equifax, Experian, and TransUnion. If you refinance with the same lender, they may choose to merely report changes to the current loan, e.g., terms, and loan balance. This is sometimes called loan modification and should have minimal impact on your credit score.
With an entirely new loan, whether with the same lender or a new one, a new credit entry is made to your report. The entry will contain information related to when the new credit was extended, loan amount, and terms. A new credit entry impacts your credit score more than a loan modification.
Whether approved or denied, the hard credit inquiry from the credit check may affect your credit. The extent to which your credit is impacted is based on your other recent credit activity but is unlikely to have a meaningful impact on your credit score.
Benefits of an Auto Refinance
The most common reason consumers refinance an auto loan is to get a better deal on terms or interest rates. Here is how this might benefit you.
Better repayment terms. If you’re looking to free up money in your budget, then repayment terms that extend longer than your original loan might help. When you have a longer period to repay your loan, you can reduce your monthly payment without a change to the interest rate.
Lower interest rates. You can also refinance an auto loan to obtain a lower interest rate. Even without a change to repayment terms, a lower interest rate can save you money over the life of the loan. Your car payment might remain the same or only differ by a few dollars, but the cost of borrowing the money would be reduced.
In either case, obtaining a new auto loan can help you to reach your financial goals.
Is an Auto Refinance Right for You?
It might be if…
Your credit score has improved. The lowest interest rates are offered to borrowers with higher credit scores. It doesn’t take long to improve your credit score. Pay all of your bills on time and keep your credit utilization below 30% to see a boost in your credit health. If your credit score has recently improved, you might qualify for better terms, lower interest rates or both.
You want to remove a cosigner. Did a friend or relative cosign on your original loan? When you obtain a new loan, the cosigner’s responsibility is removed since the loan would be paid in full. This is one of the simplest ways to remove a cosigner’s obligation from your current loan.
Better options exist with a new lender. If your auto loan lender is not providing the services you had expected, then consider shopping for a new lender. Some reasons that borrowers seek new lenders are: a general dissatisfaction with the dealership’s financing department; inability to contact customer service; incorrect recordkeeping; or inaccurate reporting to credit agencies.
Switching lenders may result in improved customer service and more flexible repayment options such as online or mobile bill pay.
You can’t afford your monthly payment. When you refinance your auto loan and extend the repayment terms, you can reduce your total monthly payment. Remember that extending the repayment terms often increases the total interest paid on the loan.
Rates have decreased. If your credit score hasn’t changed, but rates are now lower than they were when you initially took out your loan, it might be a good time to refinance your loan. Refinancing at a lower rate may save you money.
Refinancing your auto loan might not be right for you if….
You’re looking to sell your car soon. If you have plans to sell your car, remember that you must sell it for the total amount of your newly refinanced loan unless you want to pay the difference. Check the Kelly Blue Book value of your vehicle. Does refinancing your car prior to selling it make sense for your situation?
Your original loan came with prepayment penalties. Review your original loan documents. Prepayment penalties often exist as a way for lenders to recoup some of the interest they may lose when you repay your loan early. If refinancing your loan costs more than it saves, avoid refinancing.
Your credit is worse than when you obtained your original loan. Excellent credit isn’t needed to qualify for an auto loan refinance. But, don’t expect better rates and terms if your credit health has declined since the original purchase. Refinancing is subject to credit approval.
An auto loan refinance can save you money. How much you can save depends on your specific situation. Lower interest rates and improved credit scores are great reasons to consider shopping for a new auto loan. Interested in learning how refinancing can improve your cash flow? Visit GFCU Auto Loans for more information or to apply online.
Written by Freelance Personal Finance Writer, Tracy Scott