Refinancing your auto loan may be a very smart move, particularly if your credit score has gone up since you bought your car, or your financial circumstances have improved. It’s possible to save a significant amount by refinancing so you'll have a lower interest rate on your loan and save money in the long term.
At Addition Financial, we spend a lot of time with our members to ensure they understand how to improve their finances. That’s why we’ve put together these five top goals when refinancing to help you as you shop for a loan.
#1: Lower Your Interest Rate
One of the most common reasons for refinancing a car loan is to get a lower interest rate than the one on your existing loan. The interest rate isn’t the only thing that you should look at, but it is the first point of comparison.
The only way you can be sure you’re getting a good deal on an auto loan refinance is to get several quotes and compare them. Start with your existing interest rate and then complete applications with at least two lenders in the same 14-day period. (Similar queries within a two-week period are treated as one query for the purposes of calculating your credit score.)
#2: Maintain the Equity in Your Vehicle
Maintaining the equity in your vehicle is another key concern when refinancing. Equity is the difference between how much you still owe on the car and the value of the vehicle. If you’ve owned your car for a while, you have probably built up a certain amount of equity as a result, so you could pay off the loan in full and have money left over if you sell the car.
The danger when refinancing is that if you get a longer loan term, you’ll end up being “upside-down” on your car. What that means is you’ll owe more on the vehicle than its Kelley Blue Book value. If you decide to sell or trade the car, you'll owe your lender the difference between what you get for it and the loan balance.
The key, then, is to keep the amount you borrow within the limits of your car’s value. That way, you’ll still come out on top if you need to sell or trade.
#3: Finance for the Shortest Term You Can Afford
For most people, the benefit of refinancing a car loan is that it lowers their monthly payment. That makes sense, but it’s also important not to focus on the monthly payment at the expense of being aware of the total cost of refinancing.
What we’re getting at here is this: you could, in theory, lower your monthly payment simply by extending the term of your loan. However, if you do that, you’ll end up paying far more in interest than you would with a shorter loan. You’re also more likely to end up owing more than your car is worth. It’s important to be aware of how a longer term affects your finances.
#4: Watch Out for Out-of-Pocket Expenses
Closing on any loan entails paying some out-of-pocket expenses, but these expenses on the best auto loans are reasonable. You shouldn’t be required to pay exorbitant fees to get a better interest rate or a lower monthly payment.
When comparing loans, it’s important to read the fine print and make sure you get a complete picture of the fees and costs of closing. Ask questions and read the contract in full. You may even consider asking a lawyer to read the contract on your behalf before you commit to any loan.
#5: Make Sure There are No Prepayment Penalties
You may not be able to pay off your new loan early, but it’s nice to have the option to do so if future circumstances warrant it. You can save a substantial amount in interest payments if you can afford to put a bit more money toward your car payment each month.
On a related note, it’s also a good idea to confirm that if you overpay each month, the amount of your overpayment will go to the principal loan amount and not to interest payments. Not every lender offers this option, but if trying to pay your loan off early is important to you, then you should ask how that works so you can be sure you’re getting a good deal.
Of course, a related option is to ask for a shorter loan period. For example, you might be willing to increase your monthly payment a bit if it allows you to pay off your loan earlier and save money on interest.
Comparing refinancing options requires basic knowledge of key car loan provisions and a willingness to read through the fine print so you can be sure you understand what you’re getting. The five goals we’ve outlined here will help you get the best car loan possible.
To learn more about refinancing a car loan with Addition Financial, please click here.
Posted on Sep 12, 2018
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