There can be financial advantages to refinancing a vehicle loan, but it depends upon your circumstances. The following are three reasons you might want to consider refinancing your car loan.
Your credit is much better now
The biggest factor in determining your interest rate for your car loan was your credit rating, but if there has been a significant change in your credit score since you first applied for your car loan, you may be able to refinance the loan at a lower interest rate.
The biggest factor will be if you have had one or more negative marks disappear from your credit report. In some cases, you may have been able to have them removed, but bad marks will drop off your report over time. In addition, if you have paid off some of your outstanding debt and your available credit to debt ratio has risen significantly, this too will increase your credit score.
Your income has risen
This can help you in a couple of ways. One is that your income to debt ratio may be better, and this can push you interest rates down. But more importantly, if you have more income, you may be able to afford a higher monthly payment. Refinancing at the same interest rate but for a shorter period of time will mean a higher monthly payment, but it also means that you will pay off you loan more quickly. This will result in a total savings on interest paid for the loan. In addition, if you can refinance at a lower interest rate for a shorter duration, you may lower your monthly payments.
Interest rates for car loans have dropped significantly
How much of a drop in interest rates that will motivate you to refinance is up to you and your particular financial situation. However, keep in mind, since the time that your car loan was approved, it is likely your car has depreciated, and for a new car, this can be significant amount. Although a lender may not demand that your car have equity, they will want to your car to have a value that is not too far removed from the amount of the loan, just in case there is a default. This refinancing option works best for those who have high-end used cars. Much of the depreciation took place before you purchased it, so there is a greater likelihood that the car has a value greater than the loan.
If you're not sure about your credit rating or how your current income will affect the cost of a loan, you can always request a few quotes to see if refinancing your auto loan makes sense.