7 Signs It’s Time To Refinance Your Auto Loan
Once you get a pre-approved auto loan and buy a vehicle, it might seem easiest to make monthly payments until your loan is paid off without ever refinancing. In some cases, this is a fine idea. On the other hand, refinancing could save you hundreds or thousands of dollars in the long run.
If you currently have an auto loan, it’s important to keep an eye out for lower rates and terms that might better suit your budget. If refinancing can help save you money, it’s worth considering.
Not sure if you should refinance your auto loan? Here are seven signs it might be time to refi.
1. Interest rates have dropped since your last auto loan
Interest rates on auto loans tend to fluctuate from year to year. Maybe you purchased your vehicle when interest rates were low, and you’re comfortable with your monthly payment. However, if you purchased your vehicle when interest rates were high, it might be time to shop for a better rate.
If you find a rate lower than your current one, you’re probably in a good position to save money with a refinance.
Remember, though, that if you’re nearing the end of your loan term, it’s best to stick with it unless you absolutely need to reduce your monthly payment.
Want to know how much you could save with a refinance? Crunch some numbers with our easy-to-use Auto Refinance Savings Calculator.
2. You’re making more money than you were before
When your income increases or becomes more stable, lenders are more interested in approving a refinance application.
While refinancing to a shorter term will likely mean higher monthly payments, you’ll be able to pay off your vehicle sooner. Plus, it will help reduce the interest you pay over the life of the loan, making it a win-win!
3. Your credit score and debt-to-income (DTI) ratio have improved
If you’ve been working to improve your credit score, you may be a stronger candidate for a loan than when you initially purchased your vehicle. When lenders believe that loaning you money is less risky, you may qualify for a lower rate.
Just make sure that, in addition to a good credit score, you also have a steady income and a stable job to go with it.
Psst! Want to improve your credit score? Read our blog article, 7 Ways to Improve Your Credit Score, for tips and tricks you can try.
A lower DTI can also help you lock in a lower auto loan rate with a lender. Before you apply to refinance, you should consider paying down any existing debt.
Wondering what DTI is? To learn more, check out our blog article, Understanding DTI: What It Is and Why It Matters. Then, use our DTI calculator to determine what yours is.
4. You can’t afford your current payments
No matter how good your financial situation is when you purchase a vehicle, setbacks can happen to anyone. If you suffer a loss of income or other financial hardship, you may be able to improve your situation by refinancing to a lower monthly payment.
You can lower your monthly auto loan payment by extending the term of your loan. Once your financial situation improves, you may be able to pay extra on your principal each month so you can repay the loan sooner. This will help reduce the interest you pay in the long run.
Before paying extra on your principal, you should check with your lender to determine if they charge a prepayment penalty fee.
At Connexus, fees aren’t our style, meaning we do not charge a prepayment penalty fee. If you want to pay off your Auto Loan sooner, we’re here to help you save money.
5. Your current auto loan is through a dealer
If you took financing through the dealer you purchased your vehicle from, refinancing with a lender could save you money. Dealers often have higher rates than banks and credit unions to make a profit.
If you’re in this situation, refinancing with a lender could help you get a lower rate and better term.
6. You have positive equity in your vehicle
Positive equity in your vehicle means it’s worth more than you owe. If this applies to your vehicle, a lender might be more likely to offer you a lower rate and approve your auto refinance.
You can get an estimate of your vehicle’s value on Kelley Blue Book. Once you have an estimate, you can subtract that number from your remaining loan balance to determine if you have positive equity.
7. Your current lender is hard to work with
Not all lenders will work with you during financial challenges or other situations. If you’re having a negative experience with your current lender, it might be time to refinance with a lender who has positive member experience reviews. And if they happen to offer lower rates, that’s a bonus!
However, before you switch lenders, you should check to see if a prepayment penalty is attached to your current loan. While switching could provide a better banking experience, it might not result in savings.
Should you refinance your auto loan?
Now that you understand why someone might refinance an auto loan, you can determine if it’s a smart option for you. Explore the benefits of refinancing your auto loan with Connexus and our competitive rates. Then, when you’re ready, apply to save!