When you first buy a new car, it’s incredibly exciting. The new car smell, the first few long drives, the ooohs and ahhhs from friends as you pull up for the first time. But when those first few car payments come in the mail, having a new car can start to lose its luster. After all, car payments can be very big monthly expenses that really put the squeeze on your budget.
But there is an easy fix for high monthly car payments: car loan refinancing. Refinancing your car can save you a lot of money and stress. So how do you know when the time is right to refinance?
Here are 3 major signs that it’s time to refinance your car loan.
What is car loan refinancing?
Before we discuss when you should refinance your car loan, we should talk about what refinancing is exactly. Car loan refinancing is when you pay off your existing car loan with a new loan, one that has better terms. Refinancing your loan can help you change the following loan terms:
Your car loan APR (this is the big one!)
Your repayment period
Your loan fees
Who is listed on the loan (adding or removing a cosigner)
Once you get a car loan, it’s incredibly difficult to simply change any of these terms. But if you refinance your car loan you can easily change one or all of them.
Where can I refinance my car loan?
There are a lot of options when it comes to where you can refinance your car loan. Traditional banks, credit unions, and online lenders are all good options, but you want to do your research to determine what will be the best fit for you.
When deciding on a lender, you want to compare all of your options. You will not have exact loan terms to look at, but you can certainly do a rough comparison of the following:
Average car loan APRs
Average fees
Customer satisfaction ratings
Repayment period options
When you decide on refinancing, you want to apply to about 4-5 lenders. But it’s even easier if you can use a company that specializes in car loan refinance, like Auto Approve. Auto Approve has relationships with lenders all across the country so they can find you the most competitive rates available. They can help you compare and choose the best loan possible, taking care of a lot of the tedious work for you.
How do I know it’s time to refinance my car loan?
Sign #1: There’s a pile of unpaid bills on your kitchen countertop.
Monthly bills add up. There’s rent, mortgages, car payments, insurance payments, utilities, groceries: it can get overwhelming. So if your kitchen counters are full of unpaid bills, it might be a sign to refinance your car loan.
Refinancing your car loan can help in a few ways. Refinancing can get you a lower car loan APR, which can lower your monthly payments significantly (more on that later though). Refinancing can also allow you to stretch out your repayment period, which can reduce your monthly payments drastically.
Let’s say you have a car loan with a principal of $20,000. You originally financed it over a three year period, and with a 8% APR, so your monthly payments are $626.73.
But what if you were able to pay off your balance over four years instead of three years? Suddenly your car loan payments would drop to $488.26 a month, even at the same interest rate. That frees up about $140 per month that you could be using for your other bills.
It’s important to keep in mind that lengthening your repayment period means that you will pay more money over the life of the loan (more time to repay also means more time to accrue additional interest). But if you are struggling with payments from month to month, car loan refinancing can be a great option to ease some of the pressure.
Sign #2: You got an alert that your credit score has increased.
You’ve been working hard to increase your credit score, and huzzah! Your work has paid off. An increased credit score can help you in a lot of ways. Good credit scores will:
Get you a better rate on car insurance
Get you approved for higher credit limits
Reduce your credit card interest rates
Qualify you to get utility service more easily
And if your score is better now than when you originally financed your car, it can get you a much lower car loan APR.
Your credit score may have increased for a number of reasons. Your score depends on five different categories:
Payment history (35%). Do you pay your bills in full and on time? A good payment history is crucially important to a good credit score.
Accounts owed (30%). How much money do you owe? How does this compare to how much credit you have available? Credit bureaus look at your credit utilization ratio when determining your credit score (and the likeliness of your repayment).
Length of credit history (15%). How long have you had your accounts? The longer you have had your accounts in good standing, the safer of a borrower you are considered to be.
Credit mix (10%). How diverse is your credit portfolio? A healthy mix of accounts shows that you can balance and juggle your finances across accounts.
New credit (10%). Do you have a lot of new credit accounts? If you have new accounts, your ability to handle them will not be reflected in the other categories, so you may be more of a liability.
Changes to any of these categories can cause a pretty big shift in your credit score, but the two most important categories are your payment history and accounts owed. If you recently paid down a large amount of debt or committed to making on time payments, that can be a major boost to your score.
Your score can change for other reasons as well. If you had a negative event expire, such as a bankruptcy, that can be a major boost for your score. Discovering an error on your credit report can also score you some extra points.
Refinancing your car loan is most beneficial when your credit score is high. The most competitive interest rates are reserved for people with excellent credit scores, usually above the 750 mark. The lower your score is, the more trouble you will have finding a competitive rate.
If you are interested in refinancing but your score hasn’t increased, work on improving this before you apply for car loan refinance. Here are the best ways to improve your credit score:
Pay down your debts that have high credit utilization ratios (this will reduce your overall credit utilization ratio and greatly help your accounts owed section)
Set up auto pay so you never miss a payment
Get a copy of your credit report and search for any errors or inconsistencies
Request higher credit limits on your accounts
Resist the urge to close accounts you don’t use (this may seem counterintuitive, but closing accounts can cause a dip in your score)
If your score hasn’t increased, take the time to work on it before you apply for car loan refinancing. It will pay off in the long run and save you a lot of money in interest.
Sign #3: You’ve seen market rates drop.
The car loan APR that you will be offered is based on a combination of your credit score, your debt-to-income ratio, your vehicle, and the prevailing market rates. Market rates were at record lows for quite a while, but we are now starting to see them climb back up. Depending on when you first financed your car, the market rates may have dropped significantly.
Market rates are controlled in part by the Fed, who sets the prime rate depending on how the economy is performing. If the economy is dragging and needs a jolt, the Fed will lower rates to encourage more spending and discourage saving. Conversely, if the economy is growing too quickly and starting to become inflated, the Fed will increase rates so that demand will cool.
If you know that the market rates are lower than when you originally financed your car, it might be a sign to refinance your car loan. You will still need to have a competitive credit score, but you will be much more likely to get a good car loan APR if the market rates are lower.
Those are 3 big signs that you should consider a vehicle loan refinance.
If you’ve seen these signs, it’s time to think about refinancing your car with Auto Approve. They can help you with the entire process, making it quick, easy, and totally worthwhile. Our experts can get you a quote in minutes and start saving you money just as quickly!
So don’t wait–if you’ve seen the signs, contact Auto Approve today and start saving!