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Tuesday, November 29th
According to Experian, auto loan debt has grown substantially in the United States in recent years. In fact, the total balance of auto loans nationwide now exceeds $1.37 trillion. More than that, the average consumer owes almost $20,000 in auto loans. Rest assured, if you are dealing with a high auto loan payment or a large outstanding loan balance, you are in good company.
Refinancing your auto loan could be a smart way to take control of this aspect of your finances. Consider that your current monthly payment is a factor of three primary components. These are the original loan balance, the interest rate and the loan term. When you refinance your loan, you have the ability to adjust all three of these factors. How exactly would this benefit your finances? Is this move in your best interest? A closer look at the benefits of refinancing your car loan can help you to answer these questions with confidence.
Save Money on Interest Charges
When you took out your current auto loan, you signed a disclosure outlining the total interest charges you will pay over the life of that loan. Depending on the size of the loan, the loan term and the interest rate, that figure may have exceeded the five-digit mark. How can you reduce the interest charge? There are two primary ways to do this. The first way is to pay your loan balance off early. The second way is to refinance your car loan with a lower interest rate.
According to Statista, auto loan rates have declined steadily since the middle of 2018. If you purchased and financed your vehicle within the last several years, there is a strong chance that you may now qualify for a lower interest rate. The actual interest rate that you qualify for hinges on you. Your credit rating is one of the most relevant qualifications. If your credit rating has decreased since you last applied for a car loan, there is a chance that you may not get approved for a lower rate. On the other hand, if your credit rating has improved, you may enjoy great savings by refinancing your loan today.
Keep in mind that there are other factors at play that influence interest charges, such as the loan term and the starting loan balance. Through refinancing, you could adjust these factors to reduce your total interest charges.
Reduce Your Monthly Car Loan Payment
Your financial situation can change dramatically within a few short years. A car loan payment that was once affordable for your budget may no longer be manageable. For example, you may have changed jobs, or your other expenses may have increased. If you are struggling to make your payment on time each month, keep in mind that the best time to refinance a car loan is before you miss any payments.
There are other reasons why you may want a lower monthly car loan payment. If you are preparing to apply for a new home loan, for example, you may be looking for ways to reduce monthly expenses. After all, your monthly debt obligations directly impact your qualifying debt-to-income ratio. This means that a high monthly debt load can reduce the home loan amount you qualify for. Because auto loans are often significant expenses in a person's monthly budget, refinancing the loan and locking in a lower payment could be strategically beneficial.
Remember that your car loan is a factor of the loan term, the starting loan balance and the interest rate. You have undoubtedly paid off a portion of your original loan balance at this point. After refinancing your loan, your new starting loan balance will be lower. This sets the stage for a lower monthly payment. Other factors, such as a longer loan term and a lower interest rate, can also have a positive impact on your monthly payment.
Adjust Your Loan Term
Did you apply for the longest loan term available when you bought your car? A longer loan term translates to lower monthly payments, so this is a reasonable strategy to make a purchase more affordable. However, now that you are a few years into the loan, you may wish to pay your loan balance off sooner.
On the other hand, perhaps you applied for a shorter loan term with the expectation that your financial situation would not change. A shorter loan term translates to a higher monthly payment and a rapid reduction in the principal balance. Now that your situation has changed, however, you may be interested in taking another year or two to pay off the loan.
When you refinance your loan, you generally have the ability to choose a term length between 24 and 60 months. However, there is some variation to this based on the loan amount, the age of the vehicle and other factors. By refinancing your auto loan, you are essentially resetting the clock. Your new loan will have a new payoff debt that may be more aligned with your current financial situation and goals.
Change Your Payment Schedule
For many people, an auto loan payment is the second largest monthly debt behind the housing payment. Your housing payment likely is due at the first of the month, so you may feel some financial strain if your car payment is also due around this time. If you have been looking for an effective way to adjust the due date and to gain better control over your budget, an auto loan refinance may be a smart solution. This is because many auto lenders enable you to choose your new loan payment's due date.
Have you changed jobs since you took out your current auto loan? Something as seemingly minor as getting paid weekly instead of monthly can dramatically impact how easy it is to manage personal finances in some cases. This may hold true even if your annual income has not changed. Some auto lenders enable you to choose a twice-a-month or biweekly payment schedule rather than a monthly schedule. By altering your payment schedule, you can better align your payments with your cash flow.
Explore Your Options Carefully
Each car owner has different circumstances to consider before applying for a refinance loan. In addition, each person has different financial factors at play, such as credit scores, income, financial goals and more. With this in mind, refinancing is not the best move for everyone. It is important to define what you want to accomplish by refinancing as a first step. Then, explore the loan options available to you by contacting several lenders directly. Keep in mind that a lender's advertised loan rates are usually for the most well-qualified applicants, and these may not be the rates that you qualify for. Take time to get a firm quote from a few different lenders.
Once you have all of the relevant information in front of you, use various online loan calculators to estimate monthly payments and interest charges. Focus on factors like when you play to upgrade to a new car and any major financial changes that you anticipate over the life of the new loan.
Check In from Time to Time
You may determine that refinancing right now is not feasible or beneficial. For example, you may not be able to apply for a new auto loan without paying a lump sum of cash into the refinance if you are upside-down on it. If now is not the most strategic time to refinance, the situation may change in several months. Continue to reassess the benefits of refinancing from time to time. By doing so, you can seize the opportunity to enjoy some or all of these benefits when the time is right.
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