Let’s face it: life is expensive right now. Rent, groceries, gas, insurance–the bills never seem to stop. So who couldn’t use a little extra breathing room every month? If you have a car loan, you may have heard that refinancing can help you out a lot. But what exactly is refinancing, and is now the right time to refinance?
Here’s why now might be a great time to refinance your car loan (and how you can decide if it’s right for you).
What is car loan refinancing?
Car loan refinancing is when you pay off your existing car loan with a new car loan. The new loan should have better terms and conditions. Maybe it has a better car loan interest rate (this is the most popular reason for car loan refinancing), maybe it has a different repayment period which will drastically change your monthly payments, or maybe you need to change who is listed on the loan. All of these are great reasons to refinance your car loan.
When you refinance a car you apply to different lenders as you may have done when you initially financed your car. You can apply to traditional banks, online lenders, and credit unions. You can also use a car loan refinance service that specializes in refinancing. These companies can help you navigate the process of refinance, helping you select who to apply with and determining the best lender for your situation.
Will interest rates go down in 2023?
As always, it’s hard to exactly predict what will happen with auto loan rates in 2023. But most experts predict that auto loan rates will not go down, and may tick up a bit more. This has to do with the Fed’s reaction to high inflation.
When inflation hits (which has been the case for the past two years) the government steps in to try to correct it. Our inflation situation is due to a number of factors, but supply chain issues is one of the top reasons we are in this situation. There is a lot of demand for products but there is not a lot of supply of those products. And this demand drives prices high. To combat this, the Fed tries to decrease demand in the market. Raising interest makes borrowing money more expensive, and therefore reduces demand.
So where do we go from here? The Fed still plans to raise interest rates a few more times throughout 2023, so it’s probable that interest rates will tick up higher in the coming months.
Should I refinance my car loan now?
If interest rates are increasing, does that mean it’s a bad time to refinance your car? Not necessarily. The truth is it all depends on your situation and why you are looking to refinance. To determine if now is the right time to refinance, ask yourself the following questions.
Has my credit score improved since my initial financing?
Your credit score is one of the biggest factors that affects the car loan interest rate you will be offered. If your credit score has improved since your initial financing, you may still qualify for a better interest rate. Let’s examine the different interest rates you may be offered based on your credit scores.
Let’s look at the average car loan rates for today (from RateGenius). If you have a credit score of 670, you could be offered an interest rate of 8.03% over 36 months. But if you had an excellent credit score of 810, you may be offered an interest rate of 4.67% over 36 months. That goes to show how much of an effect your credit score has on the car loan interest rate you are offered.
There are a number of reasons why your credit score may have improved since your initial financing. These factors may include:
- A negative event expired (such as a bankruptcy)
- You’ve paid off a significant amount of debt
- You have improved the timeliness of your payments
- You have increased your credit limits
- You have a better mix of credits now
- You have corrected errors on your credit report
If your credit score has improved since you initially financed, you can still save a lot of money by refinancing (even if the market rates have increased).
Do I need to add or remove a cosigner?
If you are looking to refinance your loan because you need to add or remove a cosigner, it might still be a good time for you. Many people initially finance with a cosigner to get approved (if they don’t have much credit history) or to secure a better interest rate.
A cosigner lessens the risk that the lender is taking, so you can get a lower rate by having a loved one with good credit sign their name. So if you want to get a better interest rate, you can refinance with a cosigner.
On the other hand, if you want to free your loved one from the financial responsibility of your loan, refinancing is the way to go. Be sure to prepare your credit score ahead of time so that you can get the best terms possible.
Am I having trouble making my monthly payments?
When you refinance your loan you will have the opportunity to change your repayment period. And changing your repayment period can drastically change your monthly payments.
If you are having trouble making your monthly payments, lengthening your repayment period can significantly reduce your monthly payments. Because you have a longer time to pay off the principal, your payments can reduce by hundreds every month. You will end up paying more over the life of the loan since you will be paying interest for a longer period, but this may be worth it.
You can also refinance to a shorter payment period. This will help you save money over the life of your loan since you will be paying interest for less time. You will also be able to secure a lower interest rate by having a shorter repayment period.
That’s how you can decide if now is the right time to refinance your car loan.
It’s true that right now isn’t the best time for everyone to refinance their car loan. The market rates are not particularly low, and lower rates don’t seem to be on the immediate horizon.
But that doesn’t mean that it’s a bad time to refinance for you! Refinancing is all about your personal situation. If your credit score has improved or you need to adjust your repayment period, refinancing might still be a great option for you.
Our experts at Auto Approve can help you decide if the time is right for you.