When to Refinance Your Auto Loan

When the car loan payment date comes around each month, do you find yourself wishing you could break up with your lender? The fact is the need to buy a new car doesn’t always happen at the most opportune times, or on the best terms. But just because you committed to the dealer’s “best loan offer” at the time doesn’t mean you have to stay committed for the duration. Refinancing could reduce your monthly payment and save you money. But how do you know if you’re a good candidate for refinancing your vehicle? Consider these five things before you decide when to refinance your auto loan.

Refinance To Get a Better Interest Rate

If you have owned your car awhile, you might be paying higher rates than those currently available through UFCU. In addition, if you financed directly through a car dealer, there’s a good chance your rate included lender commissions that kept you from getting the best deal. By refinancing auto loans from other lenders, UFCU has saved Members an average of $1,950 in interest on their car loans and lowered their monthly payments by as much as $50. Some lenders, like UFCU, will offer even lower introductory financing and waive title fees when refinancing from another lender.

If you have an opportunity to lower your car loan interest rate, it is a good idea to take it sooner rather than later. That’s because your car loan payments are amortized over time, with the earlier payments comprised mostly of interest costs. Getting your interest rate down as soon as possible saves you in interest and lowers your monthly payment

Refinance When Your Credit Score Has Improved

Your credit score has a significant impact on your car loan interest rate. A poor, or no, score can cost you as much as four times the interest rate available with an excellent credit score. In fact, even just a small improvement from an average to a good score can improve your rate by a half percentage point. Remember, every point saved helps to lower your monthly payment.

If you have been making payments regularly on time and your credit score has improved, now may be a great time to refinance your car loan. Here’s an example why: On a $25,000 five-year car loan, Experian says borrowers in the lowest tier of credit scores (300-500) could pay more than $6,000 more in interest over the life of the loan than borrowers in the top tier (781-850). Check UFCU auto loans for the best rates for your score.

Refinance To Lower Your Payment

If high monthly payments are stretching your budget, refinancing for a longer term (and at a better interest rate) can lower your payments. But before extending the loan term, consider the age and expected value of your car at the time you would pay it off. Borrowers whose cars are worth more than their loan amount stand a better chance of receiving a lower refinancing rate.

That’s why the best time to refinance is while your car is still relatively new and has equity. Carfax estimates that new cars lose about 20% of their value in the first year, and 15–25% over each of the next four years.

Also, consider how long you plan to keep the car. A longer-term loan can potentially put you “upside down” — meaning you could owe more on the car than it is worth when you are ready to sell or trade it in. A UFCU lending specialist can help you determine your car’s current value or check industry guides like Kelley Blue Book.

Refinance When the Time is Right

It’s a good idea to wait at least six months from the time you purchased the car before refinancing. You want to allow time for your credit score to recover and to build up a payment history. And it is unlikely that rates will have changed before then to achieve significant savings.

Know How Refinancing Impacts Your Credit

When you apply for refinancing, your lender will run what’s known as a hard credit inquiry on your credit report. A hard credit pull can cause your credit score to drop by up to five points, and it will stay on your credit report for two years. If you have outstanding credit, this small decline will have a negligible impact on your credit. However, if you have other negative factors on your credit like a history of missed payments, a hard credit pull could be more detrimental.