What to consider before refinancing your car loan
If you are in the market for a new car, it’s important to be aware of all financing options available before you take out a loan. One option is refinancing your current auto loan into another term or lender. Here are some things to consider when looking at car loan refinancing:
1. Interest rates and fees
The interest rate for a new loan may be lower than your current one, but you will likely have to pay application, origination and/or guarantee fees, plus additional costs of the new loan such as private mortgage insurance (PMI) if applicable. If you get a shorter term on your new loan, you will have to pay for a longer amount of time, and vice versa.
If your new loan has a lower interest rate than the one you currently have, it may be more cost-effective to refinance, but check your equity (amount owed on the car) first. If it is already low and your credit score is not sufficient enough to qualify for a lower interest rate, refinancing will do you no good.
2. Your credit score
The better your credit score, the more likely you are to qualify for a lower interest rate on a new loan, so it’s important to consider what your current credit score may be before refinancing your car loan. If you can’t qualify for a new loan, you will either have to continue making payments on your current one or sell your car.
If you are planning to trade in your current car when you take out the refinanced loan, make sure that it is still worth enough money to cover what you owe on your old loan plus any remaining balance on the new loan. If you plan on keeping your car, make sure that refinancing doesn’t push you over your credit limit or leave you with a higher monthly payment than you can afford.
4. Prepayment penalties
Most lenders will charge a penalty if you pay off your loan before its term is up, so be aware of any fees that may come into play when looking at refinancing your car loan. Make sure that the cost of refinancing isn’t going to end up being higher than if you had just stayed with your original lender!
5. Additional auto loan information
Before signing on the dotted line, be sure to ask about other details that may come into play when refinancing your car loan, including how your monthly payments are determined, what happens if you miss a payment or under what circumstances you could have your car repossessed. It’s a good idea to go into a refinancing deal knowing as much as you can about what your responsibilities will be and what you can expect from the new lender.
Before taking out a new loan, make sure that all of your questions are answered and carefully consider whether or not refinancing is right for you before signing any contracts or agreements.