Refinancing a vehicle loan is taking out a new loan to pay off the remaining debt on your previous loan. The majority of these loans are secured by a vehicle and are repaid in regular monthly installments over a certain length of time, generally a few years.
People often refinance their vehicle loans to save money, since refinancing may result in a reduced interest rate. As a consequence, your monthly payments may be reduced, freeing up funds for other financial responsibilities.
There are many factors to consider when deciding whether or not to refinance a vehicle loan. The main factors to consider are the interest rate, the term of the loan, and the amount of money that you could save by refinancing. You can use our iLending car refinance calculator to help you figure out what your options are.
Whether you're still not sure if refinancing a vehicle loan is good for you, keep reading to find out when it usually makes the most sense.
When is it appropriate to refinance your car?
A major choice like vehicle refinancing will be influenced by a variety of individual variables. That being said, you may want to think twice about it in the following situations:
Since you put out your first vehicle loan, interest rates have fallen.
Interest rates fluctuate often, so rates may have dropped since you took out your first vehicle loan. Even a 2 or 3 percentage point reduction might yield considerable savings over the life of your loan.
Your financial circumstances have improved
Lenders may determine your vehicle loan rate based on a variety of criteria, including your credit score and debt-to-income (DTI) ratio, which is computed by dividing your monthly income by your monthly debt payments.
As a result, increasing your credit and lowering your DTI ratio might lead to better terms on your refinanced loan.
You didn't receive the greatest deal the first time
Even if interest rates haven't reduced or your financial condition hasn't considerably improved, it may be worthwhile to browse around for better loan terms. For example, you may have obtained a loan with a 7% interest rate while competing lenders offered lower rates.
This is particularly important if you obtained your initial loan from a vehicle dealer since sellers sometimes offer higher interest rates in order to earn more money.
You're having problems keeping up with your monthly payments
Even if you can't get a lower interest rate, it can be worth looking for a loan with a longer payback duration to decrease your monthly auto payments.
If you are unable to obtain an appropriate loan, you may be able to renegotiate the payback duration on your present loan. However, bear in mind that the longer time you spend repaying your debt, the more time you spend paying interest. In general, if you have a longer-term loan, you will pay higher interest overall.
When should you postpone refinancing?
Although refinancing an automobile might save you money, it is not always the best choice. If any of these circumstances apply to you, you may wish to postpone refinancing.
You've already paid off the majority of your initial loan amount
Interest is sometimes front-loaded, which means you pay more of it off at the start. The longer you wait to refinance, the less interest you may be able to save.