Signs You Should Consider Refinancing a Car Loan

If you’re reading this, there’s a good chance you borrowed money from a lender to finance your car. However, if you aren’t happy with the offer you received, the good news is that there are ways to refinance it. 

Refinancing a car loan could help you save money in the long run by lowering your interest rate and monthly payments. This involves taking on a new loan to pay off the balance of your existing one in hopes of getting a more favorable rate. If you’re considering refinancing your loan but you’re unsure whether this is the right choice for you, keep reading to learn more.

When Does Refinancing a Car Loan Make Sense?

These three signs could indicate that refinancing your car loan is a reasonable option for you to consider.  

1. Interest Rates Have Dropped

Interest rates are constantly changing, so there’s always a possibility that they have dropped since you took out your original loan. Interest can quickly add up, and getting a more favorable rate will help ensure that you’re paying “less” money for your car overtime. Although it might not seem like much, even a 2-3% reduction can result in significant savings over the course of your loan.

2. Your Financial Situation Has Improved

Many factors affect the type of loan you get approved for, including your credit score and debt-to-income (DTI) ratio — which is calculated by dividing your monthly income by your debt payments. Perhaps your credit score or DTI ratio were less than ideal when you originally got your loan. If you’ve managed to improve your credit score or decrease your debt, you may be able to obtain more favorable terms by refinancing your car loan. 

3. You’re Looking for a Better Offer

Even if interest rates haven’t dropped or your financial situation hasn’t improved significantly, it may still be worthwhile to seek out a better loan. Auto loans are available through a variety of different sources, including a bank, credit union, online lender, or car dealership. If you didn’t get the best offer the first time around, take time to shop around and compare offers from multiple lenders. As you do this, pay attention to various factors, such as the interest rate, repayment terms, fees, and length of the loan.

When Should You Postpone Refinancing a Car Loan?

While refinancing a car loan can help you save money, it’s not the right choice for everyone’s situation. Below are three signs that you shouldn’t refinance your loan.

1. Most of Your Loan is Paid Off

If you’ve already paid off the majority of your loan, then you probably don’t need to refinance it. This is because most of your interest is front-loaded, meaning you pay a large portion of it off in the beginning. As time goes on, your monthly payments will eventually be going more towards the principal balance than interest. Therefore, the longer that you wait to refinance your loan, the less likely you’ll be able to save on interest by doing so. 

2. Your Car Has Significantly Depreciated

It’s no secret that cars depreciate in value — and fast! However, because of this, you may only be able to refinance within the first few years of owning your vehicle. In fact, some lenders won’t consider refinancing a car that is over a certain age or mileage. The older that your car is, or the more miles that it accumulates, the less likely you will be able to refinance it. 

Learn More: How Depreciation Affects Your Car’s Trade-In Value

3. The Fees Outweigh the Benefits 

Before making a final decision, it is important to weigh the pros and cons. Speak with your lender and research the additional fees that you will be responsible for if you decide to refinance. For example, you’re likely to incur prepayment penalties or refinance fees — and in some cases, you may have to pay all of the interest along with the principal balance. Consider these fees and if they outweigh the benefits of refinancing your loan.

Learn More About Financing Your Car at M&L Lexington

Refinancing a car loan can lower both your interest rate and monthly payment, ultimately saving you money in the long run. However, you should only consider doing this if the circumstances are right. For example, if interest rates have dropped or your financial situation has improved, it may be worth shopping around for a new loan.

And in the meantime, our dealership’s finance center is here to answer any questions that you might have about the refinancing process. Click the button below to get in touch with us!