What You Should Consider When Refinancing Your Car Loan
In 2017, more than six million Americans were at least three months behind on their auto loan payments. As the payout term for auto financing continues to rise, making sure you are making the right choices in loans and lenders is more important than ever. Refinancing your car loan is one way to improve how your loan works for you and your budget.
Refinancing a loan refers to when you apply and receive a loan to cover your former loan, while using the vehicle itself as collateral. With any loan, you submit some kind of security that informs the bank that you will make your payments. Most loan terms dictate that not meeting your payments for 90 days can result in car repossession. Missed payments and repossession should be avoided at all costs, as the repossession stays on your credit report for seven years.
A number of reasons and scenarios can contribute to a decision to refinance a car loan. This is an option if your income increases and you want to reduce the term of the loan, or this can be a resource if your income is reduced and you need to bring your payments down. No one likes paying more than what is fair or stretching your budget by trying to make payments that are too high.
Ideally, refinancing your car loan should only happen when it can save you money in some way, and without any long-term damage to your credit history, such as refinancing your loan too early or not making payments on your new loan. Knowing the ins and outs of how refinancing can affect your entire financial standing can be complicated. Refinancing the loan can both help and hurt. You should consider these five things while making a decision on when to refinance your car loan.
How Refinancing Will Affect Your Credit
Refinancing does result in a hard inquiry on your credit report. A hard inquiry occurs any time a lender runs a credit check to assess their risk on granting you another line of credit, and what interest rate to charge you. A hard inquiry lowers your credit score by a few points, and will usually stay on your credit report for two years. If you are applying for a new loan and immediately make timely payments in full, you should gain those points back within a couple of months. If your credit is already low or not well established, refinancing a loan will most likely hurt more than it helps.
When Your Credit Score Has Increased
If you are in good standing with your car loan lender and other creditors, your credit score will increase. This is fantastic! After several months of being in good standing and seeing your credit score increase, you are definitely in a position to consider refinancing your car loan in order to decrease your interest rate and pay the loan off more quickly.
Changes in Your Financial Situation
There are many events and decisions that can affect your income and ability to pay bills, both for better and for worse. Layoffs, job changes, deciding to go back to school, retirement, or a great bonus are common examples of the life events that inevitably make income fluctuate. Your income can increase or decrease and can affect you in the short-term or the long-term. Either way, these are changes that make you think about your money in different ways than what you may be used to.
If your income increases and you have decent credit, you will benefit from refinancing to reduce the loan term and overall pay less interest over time. If your income decreases and you are worried about not being able to make payments, refinancing for a longer loan term or a lower interest rate will be in your best interest. Overall, refinancing will affect your credit less than missing multiple payments, and not being able to pay a missed payment within 30 days of its due date. You want to remain in good standing with whatever loan you have, even if you need to refinance in order to lower and restructure your payments.
Your Progress on Paying Off the Loan
The current average car loan term is 67 months, or just more than five years. Unfortunately, loans that extend over 60 months have gained in popularity, but are not recommended. Remember that the longer you are scheduled to make payments to a lender, the more interest you are paying. Although longer car loans may decrease your monthly payments, paying more interest in the long run means that you are losing money. If you had to sign on for a long-term loan when you financed your car, refinancing is a great way to lessen the loan and avoid paying more in interest once you are in the financial situation to make these changes.
Your Relationship with The Car
If you bought a car that you love, and it has a long-life expectancy, refinancing your loan to pay it off more efficiently is a great way to finally attain full ownership of the car. There is a certain power that comes with paying off the car and having it be your property, not just a car that seems like it’s being rented to you. Think of it like you would buying a house: renting means that someone else is letting you have this very important part of your life as a courtesy and benefit to them. You are responsible for the upkeep, but you aren’t entitled to all the benefits and decision making. If you plan to keep your car for a long time, refinancing is a great way to obtain ownership more efficiently.
If you aren’t attached to your car or know that its useable life is limited, save the impact refinancing will have for when you want to apply for a new car loan. Trading in the car as part of the process of obtaining a new loan is a great way to save money on the new vehicle.
In summary, refinancing a car loan benefits those who see an increase in their income and are in good standing with their current loan the most. Refinancing should be avoided or used as a last resort for those with newer auto loans or low credit scores.
At G&E Motors, our dedicated sales team can help you find the perfect vehicle that matches your needs and budget. With over 20 years of financing experience we can guarantee loan approval for all credit levels. When we say guaranteed loan approval, that’s exactly what we mean – Guaranteed Car and Truck Loan Approval. Stop in and see the impressive inventory of quality pre-owned vehicles we have on our lot. Come by today and get the car or truck you’ve been looking for!