Auto loan refinancing can save consumers thousands of dollars in the long run, but why are less than 15% of borrowers refinancing their car loan? RateWatch, a banking data and analytics company, recently released the results of a survey that shows how today’s consumers thinking about their car loans and what factors impact their decision-making.
According to the results of the survey, only 20% of respondents between 30-44 years old took advantage of those options. More consumers are choosing to refinance their mortgage instead of an auto loan, but as Main Street points out, refinancing an auto loan can prove to be the most cost-effective option.
Credit scores can change over time for the better, especially if you’ve paid off a loan, always made your loan payments on time, or have amassed a longer credit history. When your credit gets a boost, you have access to better automobile loan rates, which, in turn, helps to keep those monthly payments lower. And more affordable monthly payments benefit your budget bottom line and may allow you to pay off that loan more quickly.
When you’re applying for an auto loan, your credit score gives underwriters an indication of your credit worthiness or risk. Those with lower scores may see higher interest rates on loans, while those with great credit may see incredibly low interest rates. When scores are lower and interest rates are higher, sometimes buyers may seek longer loan terms so that the monthly payment is more affordable. While this keeps payments lower, it also increases the total amount that is owed for interest.
Refinancing: What’s the Process?
Refinancing a loan involves a similar process as applying for a loan. Lenders will check your credit scores and review your income and/or job history to determine your credit risk or worthiness. A significant boost to your score could have a serious impact on your new loan terms. If you have a high interest rate car loan, a stellar credit score could give you an advantage by allowing you to access a much lower rate. Even if your credit score hasn’t improved a lot, if you have been making the payments on your current loan on time lenders may still be able to refinance your loan.
Lower Rates Could Mean Serious Savings
According to Experian’s State of the Automotive Finance Market; A look at loans and leases in Q2 2018, the monthly payment for new automobiles is now $525, which is noted as “an all-time high.”
A common reason for refinancing an auto loan is to lower the monthly payments. While this is the same reason most consumers refinance their mortgages, the difference lies in the costs. There are no pre-payment penalties, fees, or closing costs when refinancing a car loan. Also, consumers can save on interest charges when their car loan rate is lowered. Even a one percent drop in your rate will impact what you owe each month. And if your old loan carried a 10 percent interest rate and the refinanced terms drop it to 5 percent, the boost to your budget bottom line will be more substantial! Of course, any dent that you have made in the principal balance of the original loan also can make a difference in your new monthly payments when you re-fi.
While not all refinance terms will hold the same savings, a lower interest rate will almost always mean a lower payment. But refinancing also can positively impact other terms for your loan as well…even if it doesn’t lead to a lower payment.
Refinancing for a Shorter Loan Term
While refinancing may help you secure a lower interest rate, the new loan terms also can help you decrease the length of the loan. According to Experian’s report, more than 30 percent of buyers are financing new car loans for 73-84 month terms (that’s 6 to 7 years!). If you find that you’re able to access a much lower interest rate, you may be able to opt for a shorter loan term and keep the same monthly payment as the original loan.
So why would this be beneficial? Cars decrease in value quickly; the longer it takes you to pay for the vehicle the less equity you have in the car once you finally have full ownership. The shorter the loan term, the sooner the car has only one owner: you. Once the car loan is paid in full, you own the vehicle outright. That means, if you need to sell it for extra cash, you have that option.
Owning your vehicle and paying off the loan turns the liability into an asset. And the best part? You no longer need to worry about monthly payments. So, paying off the loan in fewer installments allows you to free up cash later.
Refinancing a New Car Loan vs. a Used Car Loan
Some buyers prefer to buy only new cars, while others opt for used. When you’re refinancing does it matter? Ideally, used car loans are written for shorter terms although this isn’t always the case. Experian’s report notes that more than 18 percent of used car loans (in Quarter 2 for both 2017 and 2018) held 73 to 84 month terms.
Both used and new car loans may be eligible for refinancing. If you have questions about refinancing a used car loan, reach out to a qualified lender for advice.
When to Refinance?
According to Bankrate, one of the most opportune times to refinance your loan is when interest rates drop. Therefore, consumers shopping for auto loan refinancing should pay attention to the actions of the Federal Reserve Bank, because interest rate hikes (or decreases) influence loan rates.
Even as the Fed is gradually raising rates, you may still be eligible to secure a lower rate now. When a consumer carries a subprime risk, the interest rate is typically much higher than the average loan rates. A golden—and prime!–credit rating decreases your lending risk and puts you back on track to secure a more traditional rate.
Bankrate also notes that you may opt to refinance if you secured your original loan through the dealership’s lenders. If you think you can score a better rate through another lender and ditch the original dealer loan, then start exploring other options.
What if You Can’t Get Better Terms?
Maybe you decided to refinance a few years ago but you couldn’t secure better terms. If you think that your credit score has improved, you could try again. The key, though, is knowing your credit score. Before you consider refinancing again, check your score through one of the three reporting bureaus. While the scores may vary, they will give you a general idea about how your score stacks up.
If you see that you’ve entered ‘prime’ territory, then you could begin to discuss your options with lenders. But if your score is still low, work on ways to boost your credit. Pay down debts and always remember to make your payments on time. Boosting your credit score and repairing your credit will go a long way to securing better loan terms in the future.
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