If you have a car loan, you may want to think about refinancing it due to economic factors or a change in your personal finances. Perhaps you can snag a lower interest rate or you’d like to consider a longer term so your monthly payment takes a smaller bite out of your take-home pay.
If you’re thinking of refinancing an auto loan, it’s wise to delve into the key features and options to see what the best move would be. Read on to learn more.
Table of Contents
Key Points
• Refinancing a car loan involves replacing an existing loan with a new one, often to secure better interest rates or terms.
• Lower interest rates through refinancing can reduce the total interest paid over the life of the loan.
• Extending the loan term can lower monthly payments but may increase the overall cost due to more interest accrued.
• Improved personal financial situations or lower market interest rates can make refinancing a beneficial option.
• Personal loans can serve as an alternative to refinancing, especially if the car does not qualify for refinancing or if the borrower is underwater on the loan.
When Refinancing a Car Loan Might Make Sense
Refinancing a car loan is the process of getting a new loan that essentially replaces the existing loan. The process involves filing a new loan application, and lenders will generally evaluate potential borrowers based on factors like their credit score and history to determine their new loan terms and interest rate.
There are pros and cons to refinancing a car loan. Generally, borrowers refinance to secure a better interest rate or more favorable terms. For example, a lower interest can help borrowers pay less in interest over the life of the loan (just be sure to factor in fees that may be due on the new loan). Sometimes, borrowers may extend their repayment term to secure lower monthly payments. This can make the loan payments more affordable on a monthly basis, though ultimately it makes the loan more expensive in the long run.
Now that you know you can refinance a car loan, here’s a look at when doing so might make sense.
Recommended: Pros and Cons of Car Refinancing
You Think You Can Do Better Than That Dealer-Sourced Loan
When you finance your car through a dealer, it can feel as though you’re going through some mysterious selection process. After the fact, you may realize that you could’ve found a better deal on your loan. Or, you might just come to hate working with your current lender. In either case, it might make sense to look into refinancing your car loan.
Your Overall Financial Position Has Improved
Perhaps your car loan was offered to you at a time when your finances weren’t as solid as they are now. Maybe you’ve since gotten a better job, paid off some debts, or have been working on making consistent payments on debts. Borrowers who have seen improvement in their financial situation or credit score may want to consider refinancing.
In that scenario, you may be able to qualify for a personal loan at a better interest rate than your original auto loan. This could lead to savings on interest, potentially lowering your monthly payments. With a personal loan calculator, you can compare what you’re currently paying to the estimated payments you might have with a new loan.
Interest Rates Have Improved Since You Borrowed the Original Loan
Another reason to consider refinancing a car loan is if interest rates have changed since you originally bought the car. Interest rates on auto loans are influenced by benchmark rates, like those set by the Federal Reserve.
If the Federal Reserve rate is low, interest rates for borrowers may also be lower. But as the Federal Reserve rate increases, the cost of borrowing money is also likely to increase.
An Alternative to Car Loan Refinancing: Personal Loans
In some situations, you might consider taking out a personal loan to pay off your auto loan rather than refinancing.
In fact, debt consolidation is one of the common uses for personal loans. This option might make sense if you have an older car or a model or mileage that disqualifies you from refinancing or if you’re underwater on your loan.
With an unsecured personal loan, which is the main type of personal loan you’ll come across, you can apply for the remaining amount of the car loan. Just keep in mind that lenders have minimum loan amounts and other requirements to consider.
To decide if this option makes sense, you’ll want to see if you get your personal loan approved for a better interest rate than your auto loan. Because auto loans are secured (meaning they’re backed by collateral — in this case, your car) they tend to have lower rates than unsecured loans, though not always, depending on your financial specifics.
The Takeaway
Refinancing a car loan may make sense for borrowers who can secure a better interest rate or otherwise more preferable terms than they have on their existing car loan. If a borrower’s financial situation has improved or if benchmark interest rates have fallen, they may consider looking into refinancing options. One option could be to replace your current auto loan with a personal loan.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.
FAQ
What to be aware of when refinancing a car loan?
When refinancing a car loan, make sure to consider whether there are pre-payment fees or whether doing so will impact your car warranty. Also, keep in mind that extending a loan’s term to lower your monthly payments can mean paying more interest over the life of the loan.
What disqualifies you from refinancing a car loan?
Several factors can disqualify you from refinancing a car loan (or doing so with favorable terms). These include low credit score, high debt-to-income ratios, and vehicle restrictions.
What are downsides of refinancing a car loan?
Among the downsides of refinancing a car loan are the fees that may be charged, having a longer loan term which can mean more interest paid over the life of the loan, and a small, temporary impact on your credit score due to the hard credit inquiry involved.
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