As much as you might love your car, you don't want to write a bigger check than is absolutely necessary to pay it off. Refinancing your car loan can get you a lower interest rate and save money that can be used elsewhere in your budget. An online calculator can help you figure out how much you'll save with a lower interest rate and how much lower your monthly payments will be if you refinance. With all this in mind, should you or should you not refinance?
Reasons To Refinance
Lower Interest Rate
Saving money on interest is a major reason to refinance your car loan. If the average auto loan interest rates have dropped—or your credit score has improved—a new lender might offer you a lower interest rate.
Let's say you borrowed $20,000 with a 6.5 percent interest rate to buy your car. Your monthly payment is $391. If you refinance to a loan with a 4 percent interest rate, your monthly payment drops to $368. That saves you $23 per month, or $276 each year.
Stretching Out Your Payments
If you're having a hard time making ends meet financially, refinancing your car loan to a new loan with a longer term can help give you some relief. Since the repayment period is longer, monthly payments become smaller.
For example, if you owe $10,000 on your car loan at 5 percent interest and will pay it off in 2 years, the monthly payment is $439. If you refinance to a new loan with a 5-year term at the same 5 percent interest rate, your payment drops to $189. Of course, the downside to this strategy is you'll pay more interest over the life of the loan. However, if you need help stretching your paycheck to cover your expenses, refinancing to a longer loan could be a big help.
Minimal Charges From New Lender
Your new lender usually won't charge much to refinance your car loan. You may have to pay a small fee to re-register the car with the state or pay a lien-holder fee to remove the old lender and add the new lender, but that’s usually all that’s required.
Reasons Not To Refinance
Your Interest Rate Could Be Higher
On the other hand, it's possible that you received a lower rate when you first bought your car. Maybe interest rates have gone up, or you've hit a rough time financially and missed some payments, which affected your credit score. Sometimes, you might pay the least amount of money if you simply keep the loan you have.
Beware of Prepayment Penalties
Some car loans include prepayment penalties, or extra charges you'll owe the original lender if you pay off the loan before your agreement is set to end. Since refinancing settles the original loan, it can trigger that prepayment penalty.
Explore all your options before refinancing your car loan, and you’ll hopefully be able to save some money in the end. For instance, if you didn’t originally finance your car at Navy Federal, you can refinance with us today and lower your monthly payments with great rates, no prepayment penalties and flexible payment options. You just might find there has never been a better opportunity to refinance your auto loan.