It's not uncommon for homeowners to refinance their home loans, but have you ever considered refinancing the loan on your car? It's surprisingly common and far easier than the sometimes painful process of trying to refinance your mortgage. But before you get too excited, we've listed some helpful hints for drivers trying to decide whether it would be a good or a bad idea to refinance a car loan.
When It's a Good Idea to Refinance
There are several situations in which it may be beneficial to refinance your car loan. One is if you're trying to take advantage of lower interest rates. For example, if you purchased your car several years ago back when rates were higher, you may want to consider refinancing in order to get a better rate. Doing so will lower your payment, but most importantly, it will decrease the amount of interest you have to pay on the loan.
It's also a good idea to consider if your credit situation has improved substantially compared to when you bought the car. If you've improved your credit enough, your interest rate is likely to go down, and that means you'll make a lower monthly payment and you'll pay out less money in interest.
Another reason you might want to refinance is to get a shorter loan term. This especially applies to drivers who have had major changes in their financial situation. For instance, if you've earned a promotion at work or you got a new job that pays better than before, you may want to consider refinancing your long-term car loan to a shorter term. Your payments will be higher, but you'll pay the car off sooner, and you'll pay less money over time in interest.
When It's a Bad Idea to Refinance
There are several situations in which refinancing a car loan won't be to your benefit. One such situation is if your existing loan includes a pre-payment penalty or other early termination fees. If that's the case, you'll want to do some math beforehand. For instance, if you have a $500 pre-payment penalty, you won't want to refinance unless doing so can save you at least $500 or more.
In general, you also don't want to refinance your car loan if you'll end up extending the loan's term. For example, if you're currently set to pay off your loan in 36 months, refinancing to 48 or 60 months is usually a bad idea. Such a change may seem tempting because it will lower your payments, but a longer loan term usually means you'll pay out more money in interest. The only exception to this rule is if you're in grave danger of not making your payments. In that case, refinancing over a longer term is better than defaulting on the loan.
Should You Do It?
If you've decided to refinance your car loan, consider letting your lender know. You may not have to shop around at all, as your bank might be willing to drop your interest rate or shorten your term. If not, start the shopping process by checking with various lenders, both online and in person.