Automotive refinances have become a popular financial product in recent years. After you purchase a vehicle, you may be bombarded with junk mail, emails, and even phone calls about refinancing your auto loan. But when is this process worth it? Do you always save money with an auto refi?
Knowing when to refinance an auto loan is important so that you make the best possible financial moves for your future. If you are thinking about refinancing, there are a few key things you need to know first.
Keep reading to learn more about when refinancing makes sense!
What Is an Auto Refinance?
An auto refinance is a financial product offered by various lenders to help car owners receive more beneficial terms in exchange for moving over their financing from their original lender.
The process of refinancing an auto loan works by the borrower securing a new loan to pay off the old one. This new loan will provide the consumer with better terms such as a lower monthly payment, lower interest rate, and different repayment period.
To obtain a refi, you will apply for a loan with a lender just as with your original loan process. The lender will check your credit as well as verify your income and employment to evaluate your overall creditworthiness. You will receive a brand new contract with terms that are different from your original loan product.
When Should You Consider a Refinance?
While not everyone can benefit from a refi, there are a few times when refinancing an auto loan would make a good financial choice. If you fall into one of the categories below, a refi might make sense.
Note that If none of the below circumstances quite fit, and you don’t see any room for improvement over the original terms of your loan, it will probably make the most sense for you to “stay put” in your current loan product.
Benefiting From an Improved Credit Score
Perhaps the most common reason that many consumers refinance is that they have recently obtained a higher credit score that gives them access to better interest rates. A lower interest rate can result in savings of hundreds if not thousands of dollars over the lifetime of the loan.
Seeking Lower Rates
Whether federal rates have dropped, or you simply have found a better deal at a different lender, you can benefit from a new loan product even if your credit score hasn’t changed. Shopping around with different lenders can help you find the best possible deal.
Experiencing a Job Change
There are a few circumstances when a refinance can help you with your employment or financial situation.
If you have been recently laid off or lost income, a refi can help by providing a longer repayment period that can cut your monthly payments down dramatically.
On the other hand, if you’ve recently had a promotion or income increase, a refi with a shorter repayment period can get your loan paid off much quicker and decrease the amount of interest you will need to pay over the lifetime of the loan.
Striving to Get Out of Debt
Even without a job change or increase in income, there are sometimes circumstances when you may wish to change your loan’s repayment period to pay off your loan faster.
If you are anticipating a big life change, such as buying a home, paying for college, preparing for a big move, or planning a wedding, you may be motivated to get that car loan paid off ASAP. As mentioned above, a shorter repayment period increases your monthly payment but decreases the amount paid in interest overall, making it a smart financial decision if you can swing it.
Is Refinancing a Car Worth It?
In many cases, refinancing a car loan is a wise financial decision that can decrease both the amount you pay in interest and your monthly payment. If you shop around before choosing a lender for your new refi, you stand an even better chance of securing the best possible deal. Consider credit unions in addition to major banks and online lenders for the lowest rates and best customer service.
Ready to refinance? At 1st Advantage Federal Credit Union, we serve our members every day with friendly service, quick applications, and easy loan processing. You can save hundreds, even thousands, of dollars over the life of your auto loan by refinancing with 1st Advantage.