A bit of good news – it is possible to lower your car payment with a refinancing loan. However, a number of factors must fall into place for it to make sense. So, before you get excited about what you’ll do with all of the money you’ll save, let’s take a moment to consider the process so you can see if it makes sense for you.
Here’s a simplified look at car refinancing.
Let’s say you have no credit history, or a poor credit history and you need to buy a car. You’re asking a lender to take a chance on you in either of those situations.
And yes, any time a creditor extends a loan, they’re taking a risk. However, if you’ve no record against which they can calculate the degree of that risk, or your record indicates you’re likely to be more of a risk, you’re going to be asked to pay more in interest.
This means your car payment will be higher. But, after a year or so of making your payments on time, you might qualify for a lower interest rate—in which case refinancing makes sense.
Another scenario in which refinancing can be beneficial is when interest rates drop significantly. If, for example, you’re currently paying 10 percent and rates drop to three, refinancing your loan is likely to save you some money.
Along those same lines, you may have been qualified for a better deal than the one you have but didn’t know. It never hurts to look around to see what else is available, especially during the first couple of years of the loan.
How it Works
As we mentioned above, a refinancing car loan like those offered by RoadLoans can reduce your monthly payment with a lower interest rate. Refinancing can also lower your monthly payment if you agree to accept a longer loan term than the one you currently have.
Here though, you have to be careful you don’t wind up paying more than you would have with your original loan. It’s easy to lower a payment with a longer term, but it’s easy to disguise a higher price this way too.
You should also review your credit history and check your credit score before seeking any type of financing. That way, when you’re talking to people about financing deals, you’ll know what your situation is for yourself—rather than having someone dictate it to you, perhaps erroneously.
Next, you should find out exactly how much it would cost to pay off your current loan and how much your car is currently worth. Ideally, the market value of the vehicle will be more than you owe on it. If it isn’t, refinancing might not be the best move, as you’ll be digging a deeper hole—assuming you can find a lender willing to loan more on the car than it is worth.
With those numbers in hand, run them through an auto refinance calculator to see what your potential savings might be. Then, compare the result to the parameters of your current loan to see if you’ll realize a benefit by refinancing.
With that said, there is one more factor you need to take into consideration. Car loans sometimes come with origination fees. Investopedia defines these as upfront fees charged by lenders for processing new loan applications. These are used as compensation for putting the loan in place. Origination fees are usually quoted as a percentage of the total loan and are generally between 0.5- and one percent in the United States, which can add an additional cost to your deal.
Do-Overs Are OK, Smart Even!
Bottom line, if you find you’re in an unfavorable loan, it’s your right to seek a do-over with another lender. So, before you resign yourself to being stuck with an abnormally high car payment, looking into a refinancing car loan to see if it will work for you is always good idea.
Rachel Slifka is a freelance writer and human resources professional. She is passionate about helping fellow millennials find success with their finances and careers. Read more by checking out her website at RachelSlifka.com.