3 Reasons to Refinance Your Auto Loan

Contrary to what many think, it can be a challenge to refinance an auto loan and there may be penalties associated with the process. Lenders who advertise easy, cheap refinancing are rarely telling the whole story. These lenders use enticing offers, but they often present unfavorable terms. As a result, it is only a good idea to refinance your loan if the potential rewards outweigh both the hassle and cost of the refinance. 

#1 Avoid Default

The best reason to refinance an auto loan is to stay out of a default situation. If you can no longer afford your loan due to a change in your financial situation, you should contact your lender immediately before missing a single payment. Tell your lender you will need to file a hardship letter, and ask the procedure for doing so. A hardship letter both explains and proves the change in your situation; lenders will be more likely to respond to this type of request because it will ultimately save them money over allowing your loan to go into default. A hardship letter will include:

  • Proof you made an honest effort to repay your loan prior to your current hardship.
  • Proof you have experienced a hardship that will make it impossible for you to continue your loan at the current rate.
  • Proof this hardship will not go away in the immediate future.

Examples of hardship include sickness, disability, job loss or divorce. Overspending is not a hardship that will qualify you for an easy refinance on your existing debt.

#2 Pay Down Debt

If you have the chance to pay down a large portion of your debt, you may be able to shorten the life of your loan and save a tremendous amount of money in the end. This type of refinancing allows you to change the terms of your loan to opt for a lower principal amount. You can keep the length of the loan the same and elect lower monthly payments, but it is a better idea to shorten the loan and pay the same amount each month. Paying down debt may come with a fee at your current lender. If this is the case, consider using a third party to source a new loan. Your credit score may drop, but overall the savings can be worth the penalty.

#3 Get a Better Rate

Some people refinance in order to get a better interest rate. In this case, you should be certain the rate is low enough to make up for both a drop in your credit score and a potential financial penalty. The one exception would be refinancing from a variable rate to a fixed rate. If you only qualified for a sub-prime loan at a variable rate when you took the loan but have since improved your financial situation, refinancing for a fixed rate loan is almost always a good idea. Locking in a fixed rate makes your loan more predictable over time, saves you money in the long run, and helps you avoid defaulting by keeping your monthly payments low.

Need an Auto Loan? Get a Free Quote Here!