Americans spend a lot of time shopping for cars. They stroll through dealerships, browse the web and study articles in car magazines. With so much research in hand, it makes sense that they’re often happy with the car, pickup, SUV or van they end up buying. Not everyone may be happy with their financing, though.
Fortunately, just as you can trade in a car, you can trade in your original auto loan for a better one. The process is called refinancing. And though it’s often discussed in terms of getting a new mortgage for your house, you might be able to save yourself some good money each month if you refinance your car loan.
How do you know if refinancing is right for you? Here are five scenarios when you may consider applying for an auto refinance loan from Commonwealth Credit Union in Kentucky.
Your original loan is from an auto dealer
Scenario: Dealers often do business with several banks and lending companies. But they’re not usually seeking the best deal for you. Instead, they may steer you toward a loan that gives them a bigger profit. In fact, some lenders pay dealers a commission. They may also mark up the lender’s interest rate by several percentage points and pocket the difference.
Refinancing Result: One study by the nonprofit Center for Responsible Lending found that the average loan rate was marked up 2.5 percentage points. Refinancing the loan back to a fair market rate can save you hundreds of dollars in interest charges over the course of the loan.
Overall interest rates have dropped
Scenario: You financed your vehicle through an honest dealer or a bank with a great reputation. When you took out the loan, you were certain you were getting a fair deal. But in the time since, national lending rates have fallen considerably.
Refinancing Result: On average, Americans pay about $33,000 per vehicle. If you have a 60-month loan and refinance to an interest rate that’s 2 percentage points lower, you can save about $30 a month. That adds up to a $1,800 over the life of the loan.
You need to increase your cash flow
Scenario: When you bought your vehicle, you chose a loan with a short repayment period, perhaps three years. Since then, your finances have changed. You may have lost your job, had a baby or bought a house. In any case, that high monthly car payment is taxing your budget.
Refinancing Result: To reduce your monthly payments, you can extend the length of the loan. Let’s say you’re paying off a $25,000 loan at 3.5% interest. With a 36-month loan, your monthly payment would be roughly $730. If you refinance to 60 months, your monthly cost will drop to $455.
Your credit score has improved considerably
Scenario: When you bought your car, you were struggling financially. Maybe you had just graduated from college. You may have run up some debt or had a low-paying job. Your loan probably came with a high interest rate. But now things have changed. Your job pays well, and you’ve wiped out a lot of your debt. Now, your improved credit score could put you in a good position to refinance your vehicle.
Refinancing Result: Credit scores are three-digit numbers that summarize your financial history. They play a large role in determining whether you qualify for loans and the rates that are available to you. A higher score means you’re considered a lower risk to your lender. If your financial turnaround has pushed your credit score above 700, you can probably qualify for a favorable refinancing rate.
Your car is not aging as well as your loan is
Scenario: You may be dealing with mechanical issues, or you’ve put a lot of miles on your vehicle and it’s starting to show. In any case, you doubt the vehicle will last until your current loan is paid off.
Refinancing Result: In this case, it makes sense to refinance to a shorter loan period. While this will increase monthly payments in the short term, there will be long-term savings. For starters, you’ll pay less interest with a shorter-term loan. Secondly, you won’t have to make two sets of car payments when you buy your next vehicle. And lastly, you might qualify for a better interest rate when you finance your next car or truck if you’re not carrying as much debt.
There are, of course, many other reasons to refinance your auto loan. If you’ve moved your checking and savings accounts to a new bank or credit union like Commonwealth Credit Union of Kentucky, for instance, you may consider moving your car loan as well. That’s because many institutions offer loan discounts to checking and savings members.
Still deciding whether you should refinance your vehicle loan? Discover how much you can save with our auto refinance calculator. When you are ready to apply, you can access our easy-to-use online application. Our expert loan advisors can also guide you through the loan application process and answer any questions that you have about refinancing your loan. Contact Commonwealth Credit Union to learn more about how we can help you refinance your auto loan in Kentucky.