Refinancing an auto loan isn’t always a smart move. It occasionally provides customers with a reduced interest rate and smaller monthly payments, but this is something that should be carefully evaluated before proceeding. If you don’t pay back the loan, you could face a number of consequences. From having a negative impact on your credit score to being approached by Kinum or other debt collection agencies, or even having your automobile repossessed. Before making your final choice, it’s important to weigh the advantages and disadvantages of refinancing. Refinancing your car loan, per Lantern by SoFi, “may cut your interest rate and save you hundreds, even thousands, over the term of your loan.”
Before agreeing to refinance a car loan, take into account the following:
What Are the Refinancing Requirements of the Lender?
Before choosing to refinance a car loan, borrowers must be aware of the restrictions set forth by their lenders. Then, customers must utilize a car loan refinance calculator to see whether refinancing is worthwhile. Would you like to learn more about this invoice price?
Do prepayment penalties exist?
Some lenders impose prepayment penalties on customers who pay off their loans early. Refinancing is a smart move, though, if the prepayment penalty is much lower than the savings.
Will the Interest Rate Decrease Noticeably?
Refinancing might be wise if a borrower can get approved for one with interest rates that are much lower than those of the original loan. It is not a good idea, though, if the interest rate is the same or greater.
Is your credit score higher now than it was when you first applied for the loan?
Most people’s credit scores aren’t very spectacular when they buy a car for the first time. After some time has elapsed, a consumer’s scores can be significantly higher. If so, refinancing would be beneficial because the buyer would be eligible for a cheaper interest rate.
Is your current monthly income less than it was when you initially applied for the loan?
Refinancing could assist reduce a borrower’s monthly payment if his income has decreased since he applied for his auto loan. He will then reduce his likelihood of experiencing severe monetary difficulties.
How long are the terms of your loan?
Consumers will lengthen the terms of their loans if they refinance them. Although their monthly payments would decrease, they will end up paying more interest overall. Consumers would need to refinance into a loan with a lower interest rate and shorter periods in order to benefit. As a result, less interest will be paid overall for the loan.
When Should an Auto Loan Be Refinanced?
Consumers should ask themselves the following questions to determine if now is the best moment to refinance after determining that the lender’s requirements are advantageous:
Have You Made Any Prominent Payments in the Past?
People must build a repayment history before they can refinance their auto loans. If it is the consumer’s first vehicle, they typically have to have paid off the loan for a full year. For instance, after around six months, someone with a longer credit history would consider refinancing.
A lower interest rate exists?
When the Federal Reserve reduces interest rates, financial institutions also do so. For instance, now that the Federal Reserve has just cut interest rates, it is time to refinance if a consumer bought a car when interest rates were quite high.
To find out how much money you could save by refinancing your auto loan, use Lantern Credit’s online tool.