For many people stuck in an unfavorable auto loan even though their situation has changed, car loan refinancing can be a bit of a godsend. In fact, you can even take advantage of it if you presently have a fairly good loan; if interest rates are low, for example, it could save you hundreds - or thousands - of dollars.
As a general rule, taking advantage of refinance car loan rates is a good idea if your current rate is higher than 6% - but you’ll explore other reasons why it may be a good idea.
An Improvement in Your Credit Score
The good thing about the credit score is that it is always a work in progress. Since it is a measurement meant to denote a borrower’s creditworthiness to merchants, you can steadily improve it by paying your bills on time and reducing your debt loads (as in, avoid using too much of the credit you have available).
Many times, people buying their first cars don’t have much of a credit history, or perhaps had some credit mishaps in their earlier years. This improves as you get older, in general, so the interest rates for which you are eligible now are often quite a bit lower than the ones you could get before. In fact, it only takes a few months to see improvements in your credit score if you’re being responsible. This score is the single biggest contributor to the auto loan rates you can command.
Increased Knowledge of the Auto Loan Landscape
Sometimes, people with high credit scores don’t enjoy the best rates on their car loan. How is this possible? Well, knowledge is power - and they may have gone to an auto dealer to get their first car, not knowing that these dealers aren’t generally as competitive as the consumer sourced alternatives. If you have great credit, and check some loan charts to see that your rate isn’t as good as it could be, then refinancing could be an option. There is a fee to refinance, so make sure the difference isn’t so small as to not be worthwhile.
A Financial Crisis of Sorts
This happens to most people at some point in their lives; if you’re going through some trouble with money, then many auto lenders will allow you to lower your monthly payments. This necessitates increasing the loan term, of course, and means you’ll be paying more for the car in the long run. You could, should things get better, refinance again and increase your monthly payments to bring everything back in line with the true value of the vehicle.
During this time, it’s important to continue paying your credit card bills on time, so that your score will continue to rise over the months you work to restore your financial health. Once you’re ready to refinance, you may even be able to secure a better interest rate than before.
Fluctuating Interest Rates
There comes a time, inevitably, when auto interest rates will drop - it’s the nature of consumer economics. Therefore, if interest rates are more favorable now than they were when you initially received your auto loan, you could refinance to take advantage of the lower rate. They would need to have dropped a couple of points though, otherwise you may be paying more for the refinance option than the end result is worth. Us a rate calculator to quickly determine whether or not it’s worthwhile. Usually it is; after all, a couple of points can end up saving you a few thousand dollars over the lifetime of the car loan.
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