Consumers have been refinancing their homes for years, keeping track of mortgage rates and seeking out new loans as interest rates fall. That sort of thinking can also be applied to auto loans, a consumer loan that can prove costly when rates are high. Unlike home refinancing that requires mounds of paperwork, auto loan refinancing can usually be completed within mere days.
Auto loan refinancing may make sense for you provided the following has taken place since you took out your loan.
1. Your credit history has strengthened.
Some car shoppers get saddled with high interest rate auto loans because their credit scores were low. Interest rates for car loans are based on a number of factors, with your credit history a huge consideration. If your credit score is now very good or excellent, then you should qualify for a lower interest rate loan. Obtain your credit reports from AnnualCreditReport.com and pay the fee to get your credit score.
2. Loan rates have fallen.
Not only has your credit outlook improved, but loan rates on cars have dropped. Perhaps you got a loan through a financing company and have since joined a credit union. Your new financial institution may offer low-rate refinancing, enabling you to save money.
3. Your finances are better.
Besides an improved credit score and lower interest rates, your personal finances may be better. If that is the case, you may be able to turn that six-year new car loan into a two- or three-year used car loan. You can do this by paying off part of the old loan and refinancing the balance. Your monthly rate may actually come in higher, but you may be able to shave a year or two off of payments, saving you money.
4. Consider your home equity.
Some consumers have discovered that paying off a car loan with their home equity makes sense. Under this arrangement, you take money out of your home and use it to pay off your car. The advantage here is that your monthly payments are lower. The disadvantage is that it may take you several years longer to pay off your car.
Inasmuch that auto refinancing can lower your payments, reduce your interest rates and save you money, there are so matters to consider as you shop for a loan. Keep these in mind as your explore your options.
First, what is your car worth currently? Unlike homes that usually appreciate, cars lose value. Therefore, there is a possibility that you owe more money on your car then it is worth and that means you will have to come up with some cash to make up the difference. Check out Kelley Blue Book for its current value. Contact your lender to find out what the pay off amount is for your current car loan.
Second, some loans have built-in prepayment penalties that must be handled before you can get out of a loan. You may be required to pay back the full amount of the loan plus interest to get out of the original loan despite paying if off ahead of time. Familiarize yourself with your sales contract and its financing clauses.
If you are turned down for refinancing or find that the savings are not as robust as you had hoped, there is another option: paying down your current loan as quickly as possible. Here, you will still make your monthly payments, but you may be able to double up your payments or at least add more payments during the year. Only take this option if you believe that you can afford putting out more money each month in a bid to put your auto loan behind you.
Jenny Willis is a professional blogger that enjoys providing consumers with personal finance advice. She writes for Purechecks.com, a leading check printing company of designer personal and business checks.