What does every sixteen-year-old want for their birthday? A car. Heck, who doesn't savor that new car smell? Unfortunately, that excitement can cause us to enter some pretty bad deals. If that happened to you, worry not, you can always refinance your auto loan. In this guide, we'll walk you through the reasons to refinance, some of the potential downsides, and what you should know before you research new deals.
The Pros Of Auto Refinancing
- Lower Your Monthly Loan Payments- This is typically the primary reason for refinancing. Refinancing your auto loan can, depending on your current rates, save you hundreds of dollars a month, freeing up much-needed cash flow. There is a potential tradeoff to this benefit which you might not want. We'll get to this in just a minute...
- Paying Less Interest On Your Auto Loan - The price you see on the sticker is not the price you end up paying (unless you pay it in full in cash). If you finance your car, interest will be added to your total cost. It's just spread across the duration of your repayments. For example, a $15,000 car financed at 3.5% for 60-months, will cost you $16,380. If you had the same deal financed at 3.0%, it would save you $180.
- Removing Or Adding A Co-Signer - If you were young or had poor credit when you purchased your car, you likely did so with the aid of a co-signer. Years later, sharing ownership with your parents maybe isn't ideal. When you refinance your car loan, it is a whole new agreement.
The Cons Of Auto Refinancing
- You Might Spend More Longterm - A common way to get a lower monthly payment is to extend the terms of your car loan. Imagine that your original loan was for $15,000 financed at 3.5% for 48-months. Your monthly payment would be $335. To keep this situation simple, we'll pretend you're refinancing the full $15,000 at the same rate of 3.5% but you extend the loan term to 60-months. Your new monthly payment drops to $273. Having the extra $62 a month might be worth the change, but you should know the tradeoff. With the 48-month loan, the total amount you pay back would be $16,080. At 60-months, the total amount you pay is $16,380.
- Your Credit Score Might Be Impacted- Refinancing your auto loan can impact your credit score for the negative, but in most cases, your score will only suffer a small and temporary dip. There are three major areas refinancing will effect.
Any financial institution will need to pull your credit score in order to determine what rates they can offer. Too many hard pulls during a period of time will hurt your credit score. You can help minimize the impact by researching institutions before you apply to know who is offering the best score. If you know your score, you can ask what rates they believe they could provide. Once you are ready to apply, try to submit all of your applications within a 14-day window. These inquiries will typically be grouped into one incident.
Change In Credit Utilization
Credit utilization is the percentage of your credit that you have currently spent. For examples, if you have a $100 credit card limit and you but something that costs $30, you are utilizing 30% of your credit. A general rule of thumb for creating a good credit score is to not use more than 30% of your credit. Refinancing your auto loan can change the percent of credit that you are utilizing, which could result in a lowered score.
Change In Payment History
Your history of loan repayments is arguably the most important factor in establishing good credit as is the age of credit lines. When you refinance, you essentially delete the previous line of credit, which would remove that age or credit and those on time repayments. Another potential hiccup is missing the last payment on the old loan.
When Should You Refinance Your Auto Loan
- Your Credit Score Improved - It's common for someone to buy a car when their credit is, well, not good. But as you get older and your credit improves you gain access to better deals. This is one of many reasons why knowing your credit score is so important. If your score goes from good to excellent, it might be a good time to consider refinancing.
- Rates Have Dropped - You might have seen that interest rates are currently on the rise. When the FED raises interest rates, so do banks and credit unions. Of course, sometimes interest rates go down. If you financed your car during a time of high rates and then the rates drop, it is a good time to consider refinancing.
- You've Established Enough Payment History - Many of us find the car that we like and then get financing through the dealer... and those aren't always the best deals. Driving your new car home you might pass by a community financial institution's billboard only to realize they offer a much better rate. Unfortunately, it's hard to do a return on a 4-year loan. If this is your first car, you will need to establish some repayment history before you consider refinancing, typically 1-year. If you have a longer credit history, you can consider looking at refinancing your car loan after 6-months.
What Do You Need Before Refinancing
- Your Credit Score - Knowing your credit score is important to determine what refinancing offers you could expect. If your credit score has gone down, it is unlikely that you'll find an offer that is in your favor. Luckily, everyone is entitled to know their credit score for free from each of the Credit Bureaus.
- Your Car Details - Financial institutions will want to know details about the vehicle you are refinancing. Be prepared with your:
- Make and model
- VIN number
- Research - If you've read this post, you're already well on your way. You know the reasons that you should refinance and some of the reasons that it might not be in your best interest. Now it's a question of finding the best deal for you. Like shopping for a car, you should research different institutions in your area. Don't just look at rates. Consider their service, features, and digital capabilities. Repaying the loan should be easier than taking it out.
As a note, if you have an old car, you will have a difficult time finding an institution to refinance. If you are underwater (meaning you owe more money than the car is worth), it is also unlikely that you will find a lender to refinance your auto loan.
Best Of Both Worlds?
People refinance because they need more cash today and because they want to get out of debt more quickly. Wouldn't it be nice if you could have both? You can. The Kasasa Loan is the first loan to offer take-backs, a feature that allows you to pay ahead on a loan but take-back those extra payments whenever you need it. Imagine you have a $1,000 bonus (lucky you!). You know that by paying that towards your auto loan, you can cut months off of your loan duration and save a lot in interest, but you're worried about needing that money later. With the Kasasa Loan, you can pay ahead and if something does come up, like a flat tire, you can withdraw that money with no penalty.