Undoubtedly, many of us end up with undesirable auto loans because of many unfavorable situations. Besides, people also tend to pay higher interest rates at the beginning of their financial journey because the lender wants proof of their credibility. After all, first-timers have a “thin” credit file that doesn’t give enough information on their credit history and willingness to pay back the loan. Therefore, let’s take a look at why and when to refinance your auto loan:
The pros of auto refinancing:
1. Lower your monthly car payments
The main goal of people when looking into auto loan refinancing is to lower their monthly payments. It depends on your interest rate, but on average, you can save up hundreds of dollars each month by auto loan refinancing. However, lower monthly payments lead to an extended loan term.
2. Find a loan with a low-interest rate:
Keep in mind that you don’t pay the price on the price tag only when shopping around for a new set of wheels. If you decide to finance your car, the interest adds to your car amount. Other extra charges determined by interest rate and loan term may also include.
To avoid any confusion, consider using an auto loan calculator to see the total amount you’ll be paying when financing your car.
3. Consider adding or removing the cosigner from the loan
It is common for youngsters having a bad credit score to purchase a car. But for this purpose, they may need the help of a cosigner. It is someone who is financially healthier and has a good credit score. It all makes sense, but sharing car ownership with someone is not an ideal option. Because when you decide to refinance your vehicle, you make a new agreement with your lender entirely.
4. Switch lenders
If you are unsatisfied with your current lender, you switch to another one through auto loan refinancing. You can refinance with another lender if you are unhappy with the interest rate or the loan term.
The cons of auto refinancing
1. You may end up paying more over the lifetime of the loan
As explained above, lower monthly payment is why people choose to refinance. But doing so results in expending more than the actual loan amount because of the added interest charges.
2. Your credit score can be affected
When you refinance your car loan, your credit score takes a temporary hit, which recovers within a year or two. But it leaves a negative impact on your credit score, which may create problems for you in the future.
Besides considering why and when to refinance your auto loan, you should also consider how refinancing can negatively affect your credit score.
How does auto refinancing negatively impacts your credit score?
Due to Credit inquiry:
Lenders inquire about your credit score to determine what rates you deserve. Many hard pulls on your credit score in a short time can impact the score negatively.
Therefore to minimize the impact of hard pulls when applying to multiple lenders, you should submit all the loan applications with 14 days. All the hard pulls done in this period will be considered one, and your credit score won’t be affected much.
When should I refinance my loan?
Refinance when:
1. Your credit score improves
As we know, a good credit score is the main requirement of auto loan refinancing. So refinance when you have reached the excellent point in credit score.
2. Interest rates have dropped
The FED (aka the Federal Reserve) often changes the interest rates depending on the economic situation. So don’t miss the chance and refinance right away when the rates are low.
3. You have an established credit history
To refinance your auto loan, wait for a year or two after taking out the original loan and let your payment history establish. The payment history ensures your credibility and the willingness to pay off the balance.