FAYETTEVILLE, Ark. – While homeowners are aware of the benefits of refinancing, many consumers are not aware they can refinance their automobiles.
For most consumers, an automobile loan is the second-largest note they incur. Kelley Blue Book (KBB), one of the most trusted industry and consumer sources for new and used automobile pricing, estimated the average cost of a new vehicle in 2015 at $34,500. With rising automobile prices, the option to refinance automobile loans can be appealing, saving consumers hundreds, if not thousands, of dollars on the remainder of their loan.
In contrast to refinancing a home mortgage, auto loan refinancing is easier and requires minimal fees. How do consumers determine if it’s the right option?
They should begin by reviewing the terms, interest rate, balance, payoff amount and the payoff date of the current loan agreement. Refinancing could be a good option if:
- The loan interest rate is significantly higher than current interest rates. Refinancing can reduce monthly payments, the total loan amount or the length of the loan. For example, an individual in the second year of paying off a six-year car note of $35,000 at 8.5 percent interest who refinances the loan at 5.5 percent could save $35 a month, reducing the total loan cost by $1,680.
- The current loan is a long-term loan. Because many new cars and trucks now cost upward of $50,000 and more, many car companies are offering car loans of six or more years to keep monthly payments affordable. Taking advantage of lower interest rates that many banks offer during promotion periods can reduce the length of a longer loan while keeping payments reasonable. While the monthly payments may remain the same, slightly increase or slightly decrease, depending on the lower interest rate, the borrower will save money in the long run because the length of the loan is reduced.
- The borrower’s credit score has improved. Qualifications for lower-interest loans improve with a higher credit score, so refinancing is worth exploring.
- The borrower’s financial situation has changed. Borrowers who need more monthly cash on hand or who are in danger of defaulting on a loan may consider refinancing to extend the life of their loan for the purpose of reducing monthly payments. This option will not save money, and may increase the total cost of the loan, but it is an option for lowering monthly payments.
- Making a large payment against the principal amount is possible. When someone receives a bonus, a tax refund or an inheritance, they may have a lump sum available to pay down their note. This can be a great way to refinance because a lower rate might be possible and a shorter-term loan can save significant money and get the car paid off sooner.
The majority of auto loans are structured to pay off interest at the beginning of the loan, so the first few years of paying on the loan are the best time to consider refinancing; however, borrowers may refinance at any time during the payment period.