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When Should You Refinance Your Car Loan?

last updated April 27, 2018 by

When Should you Refinance Your Car Loan?

Car refinancing is an option that you might be considering if you’re looking to save money.

Of course, refinancing your loan may not always be the best option for you It’s important to investigate whether you will stand to benefit if you choose to go ahead with it.

We are often asked the question “When should you refinance your car loan?” Which is an important question because car refinancing is not always entirely about who benefits but also when is the best time to make the change.

When Getting a Car Loan Refinanced Makes Sense

When Interest Rates Have Dropped

If interest rates have dropped since you first took the loan on you may find that you are paying more than you need to over the life of your loan.

  • You can still benefit from the reduction in interest rates by refinancing your car loan at lower interest rates.
  • Unfortunately, a refinancing loan is considered a “used car loan” which generally come with higher interest rates.
  • This means that a refinancing loan will not allow you to receive the extra low rates new vehicle buyers receive.
  • It may still be worth investigating the potential benefit for you if you refinance because you may still find lower rates than you are currently paying.
  • Over the entire length of the loan even a marginal reduction can allow you to make huge savings.

When You Need to Pay a Lower Monthly Payment

If you have had unexpected changes in your circumstances you may find that the current price you are paying is unaffordable.

  • If a car loan becomes unaffordable you will need to take the steps to cut back in different areas of your life.
  • The great news is that one of the areas you can make savings may be your car loan itself.
  • You can often find that refinancing to pay a lower amount over a longer time can help you bring your finances in order.
  • While this will mean you pay more in the long run, it is a worthwhile trade-off if you cannot realistically pay the original monthly cost.

When You Have a Better Credit Rating

If you did not have a great credit rating when you first took your car loan out, you may not have had access to the best rates.

  • If you have managed your finances well since taking the car loan out you may have a much better credit rating.
  • Lenders may offer you better rates than you previously had because the interest rates on car loans are often linked to your credit rating.
  • This isn’t a guarantee, but many people have found that their rates dropped dramatically when refinancing with a stronger credit rating.

When You Didn’t Get a Great Rate

If you took out the financing available to you at the car dealer you probably didn’t get the best rate!

  • Many car dealerships are aware of the lack of information available to car buyers and use it to sell finance with very high interest rates!
  • If you didn’t know what was available to you when you took out finance from the car dealer it may pay to shop around for refinancing options.

When is Refinancing Not For You?

There are some circumstances where refinancing may not be the best option for you. In these situations you may find that rates may be the same, higher, or lenders will reject you outright!

  1. If you have a vehicle which is worth less than you owe on your loan you will likely find that a lower rate is out of the question.

  2. This is because, in effect, your vehicle is security on the loan for the lender. If your vehicle is practically worthless the lender may end up losing a lot of money!

  3. Make sure to check the value of your vehicle before looking to refinance.

  4. You may also find that some refinancing companies refuse to accept you for a variety of different reasons.

  5. Some lenders are known not to accept older vehicles and will set out the limit in their terms and conditions.

  6. Some lenders may refuse you based on the balance left to pay on your loan.

  7. Make sure you read the small print when you make your application!

What To Do Next

When it comes to refinancing, timing is often the most important thing to bear in mind. Whether you get any benefit from refinancing your vehicle will depend on the time you choose to do it.

If you got a great rate the first time around or your vehicle has reduced dramatically in value, you won’t get any benefit by refinancing. If, on the other hand, you made a mistake the first time around or you need to lower your monthly costs it might absolutely be the best thing to do.

So, make sure you to consider your options carefully before looking to refinance your car to make sure you actually benefit from it!