Is Auto Loan Refinancing Right For You?
Is Auto Loan Refinancing Right For You?
If you’re wondering, “Should I refinance my car loan?”, consider these factors to help you decide if refinancing is the right option for you:
If you’re thinking about refinancing your auto loan, you’re probably hoping to lower your monthly payment. But a lower monthly payment can sometimes mean more out-of-pocket money over the life of your loan. Here are 6 tips to keep in mind when deciding whether or not to refinance your car loan.
1. Refinancing requirements
Each bank or lender has specific refinancing requirements, so be sure to ask for the details. For example, if you have $7,500 or more left on your car loan ($8,000 if the loan was made in Minnesota) and the car is less than 10 years old and has less than 125,000 miles, you may qualify to refinance with Bank of America. Our auto loan refinancing calculator will show you if refinancing can save you money.
2. Penalties for early payment
Does your current lender give you a prepayment penalty if you pay off your loan early? Bank of America auto loans don’t have this kind of penalty, but if you’re subject to one, do the math: If the amount saved by refinancing is significantly more than the penalty, refinancing might still be a good idea.
3. Interest rates
If the interest rate you qualify for today is significantly lower than your current loan, it might be a good time to refinance a car. If it’s the same or higher, it’s probably not the time to refinance. Remember, though: If you’re a Bank of America Preferred Rewards or Preferred Rewards for Wealth Management customer, you may qualify for an interest rate discount of up to 0.50%.
4. Your credit score
Has your credit score changed since your first car loan? If you’ve improved, your better score may help you get a lower interest rate. Learn how to improve your credit score
5. Your income
Refinancing your car loan for a lower monthly payment may make sense if your income has gone down. The lower payment can help take the strain off your monthly budget, and if you don’t have one, consider creating a budget so you can better control all of your finances.
6. Remaining time of your loan
Refinancing and extending the term of your loan may lower your payments and keep more money in your pocket each month, but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or a shorter term than your current one will help you pay less overall.
If your answer to “When should I refinance my auto loan?” is “Soon,” check out our current refinance rates and take a look at our auto loan to refinance calculator to better understand if refinancing makes sense for you.
When does it make sense to refinance an auto loan?
Have you obtained an auto loan to pay for your car? You may be able to refinance that loan to reduce your financial burden.
Refinancing an auto loan involves taking out a new loan to pay off you’re existing auto loan balance. Most of these loans are secured by a car and are paid off in fixed monthly payments over a predetermined period of time (usually a few years).
People often refinance their car loans to save money, since refinancing could mean a lower interest rate. As a result, your monthly payments could decrease, freeing up cash for other financial obligations.
Even if you can’t find a more favorable rate, you may be able to find another loan with a longer repayment period, which could also result in a lower monthly payment (although this could increase your total interest cost over the life of the loan ). of the loan). If you’re still not sure if refinancing an auto loan is right for you, read on to find out when it usually makes the most sense to refinance.
When should you refinance your car?
A decision as important as refinancing a car will depend on several individual factors. That being said, you may want to give it more serious thought in the following cases: How To Refinance Car Loans?
Interest rates have dropped since you got your original car loan
Let’s say your original auto loan was for $25,000, with an interest rate of 7% and a loan term of 60 months. If you keep this loan, you will end up paying a total of $29,702 on the loan. After making payments on this loan for one year, your balance is now $21,000. If you were to refinance and borrow $21,000 for the remaining 48 months at an interest rate lower than 5%, you would end up paying a total of $23,214 on your refinance loan. Combined with the $4,000 you paid on the previous loan, you would have paid a total of $27,214 to finance your car — $2,488 less than if you had kept your original loan.
Your financial situation has improved
Lenders can use a number of factors to decide the interest rate on your car loan, including your credit scores and your debt-to-income ratio (DTI), which is calculated by dividing your monthly income by your monthly debt payments.
Therefore, improving your credit health and lowering your debt-to-income ratio may lead to more favorable terms on your refinanced loan.
You didn’t get the best offer the first time
Even if interest rates haven’t gone down or your financial situation hasn’t improved significantly, it may still be worth looking into better loan terms. For example, you may have received a loan with an interest rate of 7% when other lenders offered lower rates.
This may have merit especially if you got your original loan from a car dealer since dealers sometimes offer higher interest rates to earn extra money. home security camera