With the ups and downs of today's economy, we are all looking for some ways to save money. So you have probably heard a lot of people talking about refinancing. And it makes sense–there are a lot of benefits to refinancing your loans, especially your car loan.
Here are 9 benefits of refinancing your car loan.
What does it mean to refinance your car loan?
Refinancing a loan is when you pay off an existing loan with a new loan that (ideally) has a better APR and better terms. By paying off your old loan with a new one, you can save a lot of money in interest. But there are other benefits too.
What are the benefits of refinancing your car loan?
Benefit #1: You can get lower monthly payments
The main reason people choose to refinance their car loans is to save money. This can be especially important for any of the following reasons:
- You are feeling the effects of inflation
- You have lost your job
- You have had your hours cut at your job
- Your other expenses have increased, such as rent or utilities
- You are trying to save up for something, such as a renovation or vacation
Whatever the reason is, some extra money every month can make a big difference for most people. Your monthly payments can decrease for two reasons: you get a lower interest rate or you lengthen your repayment period. Either way, refinancing your car loan can cut your monthly payments drastically.
Benefit #2: You can add a cosigner
If your credit isn’t the best, adding a cosigner to your loan can help you to secure a lower car loan APR. But you cannot just add a cosigner to your loan. Instead you must refinance your loan so that your credit scores and histories can be considered together. If you have a loved one with great credit (while yours is not the best), refinancing your car with their name on the loan can help you secure a lower car loan APR.
Benefit #3: You can remove a cosigner
When you take out a car loan, the lender will look at the credit score and income of whoever is applying, whether you are applying on your own or with someone else. The rate and terms that are offered depend on the credit of all parties involved. Because of this, you cannot remove a cosigner without refinancing. The lender will insist that the rate should be adjusted based on who is added to the loan.
Removing a cosigner can be necessary if you have just broken up with a partner, or if you are finally ready to be on your own financially from a parent or family member. Whatever the reason, the only way to get another person off of your loan agreement is to refinance your car loan.
Benefit #4: You can get a lower interest rate
This is the big one–the main reason people choose to refinance their car loan. This is how you can really save money in the long run.
By refinancing your car loan to a lower APR, you can save hundreds if not thousands of dollars. There are three main reasons why you might qualify for a lower car loan APR.
- The market rates have decreased. The rate you are offered will be based in part on what the current loan rates are. If they have decreased since your original financing, there is a good chance you may find a lower car loan APR.
- Your credit score has increased. The biggest factor in the car loan APR that you are offered is your credit score. It is also the part that you have the most control over. Focusing on increasing your credit score before you apply for a car loan refinance can pay off a great deal. Making sure you pay all of your bills on time and in full each month, asking for higher credit limits, and paying down debt strategically can all help increase your credit score and secure you a lower car loan APR.
- Your debt-to-income ratio has improved. Lenders look specifically at how much money you bring in compared to how much debt you are in. If either your debt has decreased or your income has increased, this can improve your ratio and secure you a lower car loan APR.
While you do not have control over the market rates, you do have control over your credit score and your debt-to-income ratio. Make sure your finances are in good shape before you apply for refinancing to make sure you get the most savings possible.
Benefit #5: You can shorten your repayment period
If you have some extra room in your monthly budget and would like to save money on the overall repayment, refinancing can allow you to shorten your repayment period. Refinancing to a shorter repayment period will most likely earn you a lower interest rate as well. Not only will you be saving because you have a lower interest rate, but you will be cutting months (if not years) off of your repayment. And that means months and years where you are not paying interest.
Benefit #6: You can lengthen your repayment period
On the other hand, if you really need the extra breathing room every month you can lengthen your repayment period. By lengthening your repayment period, you are stretching out the time you have to pay the principal back, and therefore reducing the amount that you owe every month. Although you will end up paying more money over the life of the loan (you will be paying interest for a longer period of time), you will give yourself some wiggle room in your monthly budget for wherever you may need it.
Benefit #7: It may improve your credit score in the long run
If you can make your monthly payments more manageable, you can greatly improve your credit score. Not only will you be more likely to make full, on time payments for your car loan, but you will free up money to pay down other debts. Committing to making on time payments and paying down debt are two of the best ways to improve your credit score.
Benefit #8: You can get out of a bad relationship with your lender
Sometimes relationships, even ones with your auto loan lender, just aren’t meant to be. Maybe you don’t like their customer service. Maybe they have fine print with which you don’t feel comfortable. Whatever the reason is, refinancing your car loan can allow you to break off your relationship with your current lender and start fresh with a new one.
Benefit #9: It can help you build your emergency fund
It is so important these days to have an emergency fund, a just-in-case stash of money. Experts suggest having enough money tucked away to pay for six months worth of expenses, although the vast majority of people do not have even $1000 saved for a rainy day. But if you refinance your car loan, you will free up some of your monthly budget to hide away in case of an emergency.
When should you not refinance your car loan?
While there are a lot of great reasons to refinance your car loan, there are times when it will not make sense to pursue refinancing.
Your credit score has decreased
If your credit score has decreased since your initial financing, you will most likely not find a lower car loan APR. If the market rates have dropped significantly, you might have more luck. But in general it is better to focus on improving your credit score before refinancing your car loan.
Your vehicle has a lot of miles on it
Lenders have certain requirements for the vehicles they finance. This is because your car acts as collateral should you not pay your loan back. If you default on your loan, the bank wants to be sure that they can sell your car and make back the money they put out. So if your car has a lot of miles on it or has depreciated significantly, you might not qualify for a car loan refinance.
Your loan is underwater
If you owe more on your car than your car is worth, your loan is considered to be “underwater”. Lenders will not see a value in refinancing your car and you will most likely not be able to refinance.
Those are the 9 major benefits of refinancing your car loan.
Refinancing your car loan has so many benefits and the message is clear: now is the time to refinance. Rates are still low (but they are set to rise in the near future) and it’s never been more important to pinch pennies where you can.
Car refinance doesn’t have to be complicated–and with Auto Approve, it isn’t. Get in touch with us today to find out just how much you could be saving every month. With 3500 5 star reviews on TrustPilot, you can be sure you are in good hands.