The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
Can Refinancing Lower Your Car Payment?
As people continue to limit their contact, work from home and do their best to stop the spread of COVID-19, many are diving into their monthly household costs in an effort to spend less and build up a reserve of funds. With the Federal Reserve lowering interest rates, it’s easier than ever for financial intuitions to borrow funds and offer those savings in the form of lowered interest rates on lines of credit, auto loans and more.
In terms of monthly bills, car payments are one of the most common types of loans. Overall, Americans today owe more than $1.2 trillion in auto loan debt, with the average auto loan APR being at 8.06% in 2019, which makes refinancing a very attractive option for those looking to lower their monthly bills. But how do you know if refinancing an auto loan makes sense for you? First, it’s important to understand what an auto refi is.
What is an Auto Refi?
If you have a loan for a new or used vehicle, that loan has a set interest rate for the duration of the loan. When you refinance, you can borrow what you currently owe on the vehicle at a lower interest rate or a different amount of time, which is known as the loan period. Doing either of these has the potential to lower the amount of interest you pay overall while you pay off your car.
The example below illustrates how much you can save over the lifetime of an auto loan with a better rate.
Original Loan Amount: $25,000
Interest Rate: 8.06%
Loan Period: 60 months
Monthly Payments: $508
Total Cost of Car Loan: $30,458
That’s $5,458 that you’re paying on top of the car’s original value of $25,000! By contrast, if you refinanced to even a slightly better interest rate, you would save more money over the lifetime of the loan, and even enjoy lower monthly payments.
Loan Amount: $25,000
Interest Rate: 5.5%
Loan Period: 60 months
Monthly Payments: $478
Total Cost of Car Loan: $28,652
Today, many institutions are offering auto refinance rates in the 3% range, or even lower, which means you could get an even better deal. So if you’re wondering if an auto refi is a fit for your situation, keep these questions in mind when searching for an auto refi:
Is the institution reputable?
Top tier names in lending, including major banks and credit unions, are often a good place to start. Additionally, an independent search for reviews and Better Business Bureau ratings can help you identify trustworthy institutions. Many financial advice websites will provide their recommendations for reputable lenders, such as Nerd Wallet, The Balance or Credit Karma.
Are there any fees?
Check for application fees before you begin, as well as early payoff fees. Additionally, check their policy on missed or late payments.
How much do I currently owe on my vehicle and what is my interest rate?
Check not only how much you still owe on your vehicle, but what the interest rate is and how long you have left on the loan. It could be that if you have less than 12 to 18 months left to pay off your vehicle, you may not see a huge savings with refinancing, and keeping your current loan could be your best course of action.
What is my credit score?
You’ll get the best offer and rate if your credit score is good to great, usually 670 and above. So before you begin the process, ensure your credit score is in a good place.
Reviewing your financial situation and your current needs will help you understand if pursuing an auto refi is right for you. In addition to the many options available, Desert Financial can also assist with our own auto refinance offering. Give us a call with your questions at (602) 433-5626 and we’ll help you get started!