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What you should know about auto refinancing

Want to cut your monthly expenses? Refinancing your vehicle is a relatively easy way to help your financial situation. Here’s everything you need to know about auto refinancing.

Woman working on finances at home

Why refinance your car loan?

The most common reason to refinance your car loan is to lower your monthly payment. You may love your car, but feel a little less affection for the terms of your car loan. Instead of settling for a lousy loan, consider restructuring your current loan and reducing your monthly car payment.

Auto refinancing may make sense if interest rates have dropped since you originally financed your vehicle. Alternately, your credit score may have improved since you bought your car, so you may qualify for a lower interest rate.

It may be that your original loan had a lengthy term (five to eight years) and you’d prefer to pay off your loan in a shorter time frame, thus lowering the amount of interest you must pay over time.

Any one of these reasons is a good incentive to look into auto refinancing.

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Auto refinancing options

You have two ways to reduce your monthly payment by refinancing your car. The first is to maintain the length of the loan, but reduce the interest rate. With this scenario, you’ll enjoy a lower monthly payment, and still pay off your loan by the original loan termination date.

Another way to refinance your vehicle is to extend the length of your loan. This allows you to reduce your payments by taking a longer period of time to pay off the loan. Common auto refinancing loan terms are 36, 48, 60 or 72 months. The longer the term, the lower your monthly payment should be.

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How long does it take?

Unlike refinancing your home, auto refinancing is a fairly quick process. A typical auto refinance takes less than one day to complete. Online banking can make auto refinancing an even more streamlined and simplified experience.

Sources of auto refinancing

When it comes to getting the best loan, it pays to shop around. Check with your bank, credit union or dealership to evaluate your options.

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Pitfalls to avoid

If your original loan has a penalty for prepayment, you may want to think twice about refinancing. You should also be aware of any fees involved in a new loan, which might negate the savings involved in refinancing. Avoid adopting a loan with a longer term, unless you absolutely can not afford to make your monthly payments, because you’ll end up paying out more money over time due to the increased interest.

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