If you’ve recently felt the long-ranging effects of our changing economy, you might be on the lookout for new ways to save. For car owners, restructuring your auto loan can be a great way to jumpstart your financial journey.
According to a report released earlier this year, borrowers saved just over $1,100 per year on average by refinancing their loans. In an economic downturn, those extra funds could be used to bolster your overall financial picture.
In this article, we’ll explore 5 reasons why you might want to refinance a car loan and what the process might look like for getting started.
1. You're Looking to Save
First and foremost, one of the most straightforward reasons for starting the process of refinancing a car loan is the money it can save you in the long run. As evidenced in the statistic above, average yearly savings can be significant. If you’re looking to revamp your financial health, the money saved from a car loan refinancing could be used for other obligations such as mortgage payments or credit card debts.
Freeing up a high monthly payment can leave room for you to ensure you’re able to make payments each month and potentially siphon the extra funds to wherever they might be needed next.
2. You'd Benefit From a Lower Rate
If you’re looking for a lower interest rate, refinancing is a great option to explore. If you’ve been making regular, on-time payments, your financial institution might be willing to work with you to lower your current rate.
Perhaps your initial auto loan financing was acquired through a dealership. Dealerships traditionally offer higher interest rates upon signing in an effort to make more money. To that end, it’s a good idea to take a look at the current rate you received at the dealership and see if you might qualify for a lower rate elsewhere.
A lowered interest rate typically equates to more savings over the entire life of the car loan which makes refinancing a worthwhile investment.
3. You'd Like a Shorter Loan Term
Receiving a lower interest rate saves you money over the life of the loan, but what about shortening the actual length of the loan? Refinancing helps you do just that. A shorter loan length means you’ll likely be paying less in interest as well as making fewer overall payments.
It’s important to keep in mind that your monthly payment might go up when deciding to go this route, but you’ll save money in the long run by paying off the loan earlier than anticipated.
4. You Need Cash
One of the less common reasons for refinancing a car loan relates to borrowing. If you’re in need of immediate cash, a cash-out refinance is one avenue to explore.
This process means that you’ll be borrowing based on the current equity you have in your car. Approval generally comes with updated loan terms, leaving you with some extra money at the end of the day.
A cash-out refinance works by taking the current value of your car, the amount you have left to pay on the loan, and receiving the difference in equity. For example, if your car currently appraises at $30,000.00 and you have $10,000.00 left to pay, you could refinance the difference and cash out that amount.
5. A Different Lender Offers Better Terms
Financial institutions occasionally offer incentives for new customers to refinance their auto loans. This could mean that your interest rate might go down, your monthly payment amounts might be reduced, or the length of your loan term might shorten.
Restructuring your loan with a different lender can provide different avenues for you to save and get a better deal on the books. Each lender’s criteria will vary but in general, they will look at items such as:
- Credit history
- Credit score
- Payment history
- Debt to income ratio
Are There Drawbacks?
Are there drawbacks to refinancing auto loans? Refinancing in general tends to lead to paying less in interest, thus getting out of debt more quickly. However, results and mileage will vary for everyone. When making significant changes to a loan term, it’s important to be aware of potential drawbacks.
For example, if you’re looking to reduce your monthly payment via a longer loan term, you’ll end up paying additional months of interest. Alternatively, if you decide to go the cash-out refinance route, you might find yourself having to pay the difference to your lender if you decide to trade or sell your vehicle.
Some lenders charge what is known as a prepayment fee if you decide to pay off your loan earlier than the original term. Generally, the fee is a percentage of the outstanding balance on the loan amount. Prepayment clauses set out in the terms of a loan can make refinancing more expensive.
Looking to Refinance a Car Loan?
Whether you’re looking to save some money in the immediate short-term or you’re hoping to obtain a better interest rate for the long-term, deciding to refinance a car loan can help better your financial situation.
It pays to do research with multiple lenders to see what options are available to you. While there is no one-size-fits-all approach to refinancing, having a short loan term and a low-interest rate is a good goal to shoot for.
At CarsFast Lending Arch, we’ll help you move forward on your car loan journey. Whether you drive a car, a truck, or an SUV, we’re here to help you get the best loan possible. Why not apply today? We’d love to help get you back into the driver’s seat and on the road.