Quick Steps For Refinancing Your Car Loan
By: Jean Chatzky
The Pros And Cons of Refinancing an Auto Loan
Do One Thing: Before refinancing an auto loan, take a look at your latest payment notice to see what you are charged monthly in interest and how long you have left on the loan. Then use an auto loan estimator to see if you can get a better deal.
While many of us have heard of refinancing a home loan, not as many people may realize you can also refinance an auto loan to help lower monthly payments and save some cash.
Auto loan debt in the United States is the third-largest type of debt after home mortgages and student loans are accounted for. In total, Americans owe —- wait for it — $1.59 trillion in auto loan debt, according to the Federal Reserve Bank of New York. Rising car prices fueled by pandemic shortages and delays helped to pump up vehicle prices and ultimately loan rates in recent years.
Why Refinance an Auto Loan?
Some people refinance a car loan to extend the loan term as a way to get additional cash to pay down other debt such as high-interest credit cards. If you can secure a loan at a lower rate than you have now, you could see immediate savings moving forward.
How Much Can You Save?
While every situation is different, if you are paying more than you think you need to in interest, you could potentially keep more of your hard-earned money by finding a better (lower) rate. Research conducted shows that those who refinanced loans in the last few years saved an average of more than $1,100 over the life of the loan.
Another report on auto refinancing in the United States shows that one in five adults –19 percent – who refinanced a car loan had the monthly payment cut by $150 or more. And some 56% of borrowers saved between $50 and $149 on monthly loan payments, according to an analysis of more than 300,000 loans.
What Does That Mean For You?
To decide if refinancing could be right for you, take a look at your situation. If it has been a year or more since you received a vehicle loan – and If your credit score has improved since then – your chances of qualifying for a lower rate are likely better than before.
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Why You Should Shop Around
The key with refinancing auto loans is to find a less expensive lender. When that happens, you can pay off the original, more expensive loan with the money you borrow from the new lender. How much does that cost? Often, it’s only a small title transfer fee, which is why an auto refinance can be appealing.
The Consumer Financial Protection Bureau (CFPB) offers a guide on what you can negotiate for when shopping for an auto loan. One place where there is a little wiggle room is the length of your loan.
How’s that? When you opt for a shorter loan term, you make fewer monthly payments, which in turn will reduce your overall loan cost. A longer loan, however, can reduce your monthly payment, but you will end up paying more interest (money) during the lifespan of the loan.
Use an Online Calculator
A good way to explore payment options is to use a loan calculator. To do that, go online and do a web search for an auto payment loan calculator. For the most accurate results, it’s good to know your credit score, how much you want to borrow and your current interest rate.