Is it Worth Refinancing a Car for 3%?

Is it Worth Refinancing a Car for 3%?
Is it Worth Refinancing a Car for 3%?
Finance
| May 13 2022
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When is it worth it to refinance your car loan? Your guide

When the market rates are as low as they have been this year, everyone starts talking about refinancing. And for good reason – after all, refinancing your car loan can save you a lot of money. But how do you know the time is right, and when is it worth it to refinance your car? Is there a magic APR that will make refinance a good idea? Right now, rates are beginning to go up, but you may still be able to save if you refinance your vehicle now.


Here’s how you can decide if refinancing your car loan is worth it.


What happens when you refinance a car loan?

Refinancing a car loan is when you pay off your existing car loan with a new loan, ideally one that has better terms. If you qualify for a lower car loan interest rate, this could save you a lot of money over the length of your car loan. When you refinance, you can not only change the car loan APR you are paying, but you can also change your repayment period and add or remove a co-borrower.



What is a good car loan APR?

The easy answer to this question is that a good refinance APR is an APR that is lower than what you are currently paying. But we can look a little deeper at these numbers. Here are the average car loan rates offered based on credit scores from the last three months of 2021:


Exceptional Credit (800-850): 2.47%

Very Good Credit (740-799): 3.51%

Good Credit (670-739): 6.07%

Fair Credit (580-669): 9.41%

Very Poor Credit (300-579): 12.53%


Now let’s look at the average car loan rates offered based on credit scores from the last three months of 2019:


Exceptional Credit, (800-850): 3.82%

Very Good Credit (740-799): 4.75%

Good Credit (670-739): 7.55%

Fair Credit (580-669): 11.51%

Very Poor Credit (300-579): 14.25%


Comparing these numbers to years before, we can see that car loan APRs have dropped significantly in just two years. A drop of 2% can save you a lot of money in the long run. But don’t take our word on it; let’s do some math.


Say you have a car that you purchased for $35,000 at 5% APR over a 6 year term. You would be responsible for $5,584 total in interest, and your monthly payments would be around $564 per month. After two years, you would still have a balance of about $21,464, after paying $2,795 in interest alone. But let’s say you choose to refinance. You are able to secure a loan for the remaining principal (using an amortization table shows us that the remaining balance of the principal would be $25,394) for 3% over the remaining 4 years. The total amount of interest due over the remaining four years would be $1,586. 


Total interest due from original loan: $5584

Total interest paid to original loan: $2795

Interest that would be due without refinancing: $2789

New Interest amount due with refinancing: $1586

Savings from refinancing: $1203


So, is it worth refinancing a car for 3%?

Resoundingly, well, YES! Refinancing for just a few points lower in our above example saved our hypothetical customer $1200. Keep in mind, the better your credit score is, the better car loan APR you will be offered. So if your score has increased since your initial financing, there’s a good chance you can qualify for even lower car loan APRs.



When is the best time to refinance a car loan?

There are times when refinancing makes sense, and times when it doesn’t. Here’s how you know if the time is right to refinance your car loan.


Your credit score has improved

If your credit score has improved, now is the time to refinance. You have a much better chance of securing a lower car loan APR if your score has increased. 


With the brackets above, it’s clear that car rates become lower and lower as you go up in credit brackets. At the end of 2021, raising your credit score from “good” to “very good” reduced the average car loan APR by over 2.5%. 


So how do you know if your credit score has improved? Your credit score depends on the following categories:


  1. Payment History (35%)
  2. Accounts Owed (30%)
  3. Length of Credit History (15%)
  4. Credit Mix (10%) 
  5. New Credit (10%)


The most important factors in your credit score are your payment history and your accounts owed. If you have been more consistent with on time, full payments, your credit score may have increased a good deal. If you have paid down some of your debts and lowered your credit utilization ratio, this also may have increased your credit score significantly.  You can read more tips on improving your credit score here.


You should check your credit score often, and not only when you are looking to make a financial move. Get in the habit of checking your score every few weeks. 


You should also get into a routine of checking your credit report. You can get a free copy once per year from each of the three major credit agencies: Experian, Transunion, and Equifax. Be sure to review it thoroughly to make sure there are no errors or mistakes. Catching errors on your report can bump up your credit score significantly as well.



The market rates are lower than when you originally financed

As we’ve seen, the market car loan interest rates in 2022 dipped lower than ever, so chances are they are lower now than when you originally financed. If you financed your car in 2019 and had good credit, the average APR offered was 7.55%. Car loan APRs for good credit scores were around 6% at the time of writing this blog. 


You need more breathing room every month

In addition to saving you money in interest, refinancing your car loan is a great way to free up some extra money every month, even if you don’t necessarily qualify for a lower car loan APR. When you refinance, you can change the terms of your repayment, including the repayment period. By stretching out your repayment over a longer period of time, your payments every month will be much, much lower. You may end up paying a bit more over the length of the loan, but this may be worth it to you depending on your financial situation. 


On the other hand, if you choose to shorten your repayment period, you can pay off your loan much faster and save money overall. Your monthly payments will be higher, but you will pay less interest over the life of the loan. And these savings can add up big.


You want to add or remove a co-borrower

If you want to add or remove a co-borrower from your loan, refinancing your car loan is your best option. Since interest rates and loan terms are decided on a case by case basis and depend highly on the applicant’s financial situation, lenders will not simply add or remove someone from an account. In their eyes, they can no longer be assured that the loan will be paid back. So if you want to add or remove someone from your car loan, refinancing is your best option.



Refinance sounds great! But what is the best way to refinance a car loan?

The best way to refinance your car loan is to use a company that specializes in car loan refinance, like Auto Approve. Since car refinancing is our main focus, you can rest assured that we know everything there is to know about the refinance process.


Car refinance sounds like a complicated, mysterious process with a lot of options to weigh. But with Auto Approve, it is actually much easier than you may think. In fact, refinancing a car is much simpler than refinancing a mortgage, and can typically be done in a few hours. All you need to do is fill out some basic information and we will shop around and get the best quotes for you to compare. We can then help you to weigh all of your offers and decide which car loan is right for you. And after you decide, we can help you with all of the paperwork (even the DMV papers!)


With a 4.7 out of 5 rating on Trustpilot, our clients can testify to the ease and effectiveness of refinancing. Some of our customers report slashing their interest rates by as much as 6 percentage points! That literally translates to thousands of dollars in savings. So if you are wondering “is refinancing a car worth it?”, reach out to Auto Approve to get your free quote today!



With the low interest rates available today, now might be the perfect time to refinance your car loan. 


Today’s interest rates are incredibly low and it’s important to take advantage of them while you can. When it comes to refinance, timing is key. So if you are thinking about refinancing your car loan, don’t wait any longer – get in touch with Auto Approve today and start saving your hard earned money! (Seriously, what are you waiting for?)


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