If you are unhappy with your current auto loan, an auto refinance might be a great option for you.
Whether you are looking to lower your monthly payments or lower your APR, you can save a lot of money in the short and long term by refinancing your car loan. Let’s look at how auto refinancing works and see just how much money you may be able to save.
Looking To Refinance Your Auto Loan? Here's How It Works
First things first, what does it mean to refinance? Auto loan, mortgage, and student loan refinancing are all similar, in that you are paying off your existing loan with a new loan.
Ideally, your new loan will give you better terms. Whether those better terms are a lower APR, a longer repayment period, or an added co-borrower depends on what your goals in refinancing are.
When you refinance, you will apply to various lenders to find the best rates and terms available to you. You can simplify this by going Auto Approve who will do the shopping around and comparing on your behalf.
What Are The Benefits of Refinancing Your Auto Loan?
There are a few major changes that refinancing can provide for you. But how much money can these changes save you?
One of the main reasons people look into auto loan refinance is to get a lower APR. There are a number of reasons why people may now qualify for a lower APR now than when they originally financed their loan. These reasons could include:
- Improved Credit Score - You might have a much better credit score now. This could be the result of consistent, on time payments and the paying down of debt.
- Initial Bad APR - If you had bad timing with your original loan and got an initial less than desirable APR, a lower rate might be possible.
- Better Market Rates - If the national APRs are lower than when you originally financed your car, a lower rate may be possible.
Whatever your reason is, securing a lower APR can save you a lot of money.
Let’s say you initially financed $25,000 of your new car at an APR of 6% for a 5 year term. Your monthly payments would be $483.32. You would pay a total of $28,999.20 at the end of your 5 years.
If you were able to reduce that APR to 3.4% over the same period, your monthly payments would be $453.67. Over the course of 5 years you would pay $27,220.20. The lower interest rate would save you nearly $2000.
Lower Monthly Payments
If you are able to reduce your APR, you will be able to secure lower monthly payments. But that’s not the only way auto loan refinance can reduce your monthly payments. Lengthening your repayment period can also reduce your monthly payments.
If you initially finance a car at 5% APR for $20,000 principal over a term of 3 years, your monthly payments will be $599.42. Over the course of 3 years you will pay $21,579.12.
If you finance at the same 5% APR but spread that over 5 years, your monthly payments will be $377.42. Over the course of 5 years you will pay $22,645.20. You will end up spending more overall, but if your goal is to cut down on your monthly bills, lengthening your repayment period would cut your bills significantly.
Adding a Co-Borrower
If your credit hasn’t increased, or hasn’t increased enough to secure a lower APR, adding a co-borrower might be a good idea. You cannot add or remove people from an existing loan, but auto loan refinance allows you to add or remove a co-borrower. The lender will consider your combined credit scores, so if you have someone in your life who has very healthy financials, adding them to your refinance might be a good idea. This can qualify you for a lower APR, which can save you thousands of dollars in the long run.
Removing a Co-Borrower
If you are in a better financial situation than you were previously and no longer need a co-borrower, the only way to remove them from the loan is through auto loan refinance.
You Want a New Lender
If you are unhappy with your current lender, auto loan refinance is a good way to terminate that relationship and start a new one. The most common complaints about financing companies often center around communication issues and a lack of transparency as to where your payments are actually going and being allocated. If this is something you are experiencing, you can get out of your current situation and refinance with a company that has higher customer satisfaction.
How Much Can You Actually Save By Refinancing Your Vehicle?
In short? You can save thousands! The relatively conservative examples we gave above showed how the people in the examples could save $1,779 by refinancing to a lower APR and $1,066 by refinancing to shorter payment terms. But to find out how much you in particular can save, you can use the Savings Calculator on our homepage to get a rough idea or use our quick and free quoting form to find out more specifically how we can save you a bundle of money.
What Kind of Credit Do I Need To Apply for Auto Refinancing?
You may be wondering “What credit score do I need to refinance my car?” While there is no magic number, it’s true that having a good credit score will help save you more money when you refinance. While it may be technically possible to refinance with poor credit, it is much more beneficial to do so when your credit score is higher (and, with Auto Approve, you're unlikely to have many, if any, options).
A good credit score is important for many reasons. Credit scores indicate to lenders and auto refinance companies how likely a person is to pay back their debts. Having a good credit score will get you better interest rates on credit cards and loans, higher credit limits, better insurance rates, easier approvals for rentals, a better chance at credit approvals, and gives you more negotiating power when securing accounts.
Securing a lower APR is the key to saving the most amount of money, as we see in our examples. The key to securing a lower APR is to have good credit and good timing–the market rates have a good amount of sway over the APR you will be offered.
While it may be possible to refinance with a low credit score, doing so will probably not save you money in the long run. You will most likely not qualify for a lower APR, so the main benefit would be changing your repayment term. If you lengthen your repayment term, you can reduce your monthly payments even if the APR remains the same. If you are drowning financially and need some extra breathing room, this might be an option for you. But refinancing will always be most beneficial if your credit score has increased and you are creditworthy.
And that is how refinancing your auto loan can save you a lot of money.
If you are unhappy with your current financing, refinancing might be a great option for you. Auto Approve is dedicated to finding you the best refinance rates. And with an A+ rating from the Better Business Bureau, you know you’re in good hands.