Refinancing a car is taking out a new loan to pay off the loan you currently have. This could be very beneficial if you are tired of paying a large payment or need extra money to pay down existing debt. Typically, when people refinance its to get a better rate and lower their monthly payments to free up cash for other things.
Times that refinancing your loan could make sense
- If an interest rate has dropped since you last took out your loan. Interest rates change, so there could be a good possibility that the rates have fallen since you took out your original loan. 2 or 3 percentage points could be a significant savings over the life of your loan.
- Your financial situation has gotten better. Lenders can use a lot of different things to decide your loan rate. Your credit score is better. Your debt-to-income (DTI) ratio. All of these can determine a possible better rate and savings for you.
- You’re more versed in the car lending area. You’ve done your homework. Maybe the first time around you just went into a dealership and got the car with the pretty red bow and didn’t care about the cost upfront or hidden. You understand that shopping around is a good idea as well as going to your financial institution first to see if you can get a better rate rather than going to a dealership with, they want to give you the highest.
- You’re having trouble keeping up with your bills each month. If you can’t get a lower rate, you could always try to see if you could extend the life of the loan causing lower payments to at least help.