5 Helpful Tips When Refinancing an Auto Loan

Choosing to refinance your auto loan is an important decision for both your current and future financial situation. Your current monthly payments should go down, but you also want to ensure you are providing for more stability in the distant future. For this reason, it is imperative to consider a few factors.

#1 Timing is Critical

Your interest rate is not dependent solely on your personal financial profile. The swings of the credit market will also have a large impact on the rates you will find with banks or dealership loans. Watch interest rates and research lenders that are extending auto loans. You want to find a time when interest rates are low and when creditors are offering quality loans.

#2 Beware of Fees

You will likely have prepayment fees regardless of your initial auto loan. Bank prepayment fees tend to be lower than dealer prepayment fees. You will have to cover these costs in order to terminate your initial auto loan and assume a new one. The fees should be lower than the amount you expect to save with your new loan in order for the refinancing to make sense on a financial level.

#3 Beware of Credit Pains

Aside from actual monetary penalties for prepaying a loan, you may also be penalized with your credit score. Your previous lender will report derogatory items to the credit bureaus. Refinancing one loan will cause a huge drop in your credit, but you should not take the decrease if you will be seeking a large loan within the next few years. For example, refinancing your car loan 1 year before you expect to seek a mortgage does not make sense for your credit concerns.

#4 Watch other Loan Rates

If you have any variable rate loans, including credit cards, you should be aware of how these loans may change when you modify your auto loan. You may see a rate increase on these loans that will counteract the savings you have made through refinancing your auto loan. Again, this does not make sense financially. Only modify your auto loan if your variable rate debt is relatively low in comparison, meaning you will not end up further in debt if these rates rise while your car rate decreases.

#5 Consider the Whole Picture

It is clear through the tips and advice already mentioned that refinancing is not just about getting a lower interest rate. There are a host of factors to think about whenever you modify a loan, and the majority of these factors are long-term. Thinking only about one interest rate instead of several or only about this year instead of the future will leave you in a worse place after you refinance. The goal of any refinance should always be to put you in a better place financially and personally. Do not fall into the trap of thinking a lower interest rate is all that matters. Remember the whole picture, and avoid hasty decisions about modifying any loan.

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