After buying a home, purchasing a car is one of the most expensive things you can do. Because cars are so pricey, few people can afford to buy a car outright, even if it’s used. In fact, Experian found that 85.2 percent of all new vehicles, and 53.5 percent of used cars, are purchased with an auto loan.
If you have less-than-stellar credit, a car loan can be prohibitively expensive. Rates for subprime borrowers — those with credit scores under 600 — can get loans with interest rates as high as 20%, adding thousands to the cost of the loan. But if you need transportation to get to school or work, you might have no other choice but to move forward with a high-interest loan.
If you purchased a car with a high-interest loan when you had bad credit, but your financial situation has improved since then, you might be able to save money and pay off your loan faster by refinancing your car loan. In fact, refinancing can help you save money or even give you more wiggle room in your monthly budget.
Here’s what you need to know about refinancing and how to decide whether or not it’s right for you.
What is car loan refinancing?
With car loan refinancing, you work with a bank or private lender to take out a new loan for the amount of your old one. You use the new loan to pay off the previous auto loan in full.
Your refinancing loan has completely different terms than the old one. You might have a lower interest rate, different monthly payment, or a longer or shorter repayment term.
Refinancing makes sense in three scenarios:
You need a smaller payment: If you’re struggling with your payments, refinancing can help. You could qualify for a lower interest rate and/or a longer repayment term, reducing your monthly minimum payment.
You want to save money: If you want to save money, taking out a loan with a lower interest rate can help you save hundreds or even thousands with little effort on your part.
You want to pay it off sooner: If you want to pay off your debt as quickly as possible, refinancing with a lower-interest loan ensures more of your monthly payment goes toward principal rather than interest payments. You’ll save money and be debt-free faster.
How much can I save?
Taking out a new loan to save some money might sound like a lot of work. However, the savings can be substantial.
For example, if you took out a 60-month, $10,000 loan and qualified for a 15% interest rate, your monthly payment would be $237.90 and you’d pay back a total of $14,274 over the length of your loan. That’s over $4,000 that you’d pay in interest alone.
If your credit improved and you refinanced that $10,000 and qualified for a loan with a 5% interest rate, your monthly payment would drop to $188.71. And, you’d pay back a total of just $11,323. Taking just a few minutes to submit a loan application would help you save nearly $3,000.
If you qualified for 5% interest but kept making your original monthly payment of $237.90, you’d save even more money. You’d pay off your loan a year ahead of schedule and would save an additional $300.
To find out how refinancing would affect your loan payments and how much you’d pay over your repayment term, check out the auto payment calculator.
How to refinance your car loan
Many banks, credit unions, and financial institutions offer car loan refinancing. Most of them allow you to get a quote and apply for a loan online.
Each bank has their own eligibility requirements, such as minimum credit score, income, or the year your car was made. In general, you can only refinance if your car is less than 10 years old, and there’s usually a refinance minimum. If you owe less than $5,000 on your loan, you might not be able to refinance.
Most lenders will require you to be in good standing with your current loan. If you’re behind on payments, you’ll need to catch up on those bills before you’ll be able to refinance.
Refinancing your car loan can be a smart way to save money, decrease your monthly payment, or pay off debt faster. To make sure you get the best rate possible, it’s a good idea to compare loan offers from several different lenders.
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