If you own a car, you might be considering a refinance car loan for any number of reasons. Perhaps you’re looking for a better way to manage some of your debt by changing the length and other terms of your auto loan. You might also be looking to free up more money in your monthly budget by making smaller monthly car payments. Perhaps you want to work with a different lender who can better serve your financial goals. Whatever your reason, there are some important questions to ask before you refinance your car loan.
Does your vehicle qualify for refinancing?
The state of your existing loan and vehicle may affect your chances of a refinance. Consider how long you’ve had your current auto loan. Lenders usually like you to have your loan for six months before you refinance.
Similarly, if you’re close to paying off your loan, a lender may not be interested in refinancing such a small amount. Lenders typically like to have a loan term of at least 24 months, so anything less than that may not be worthwhile for them — remember, they make money in part on the interest you pay on a loan.
Being “underwater” or having negative equity in your vehicle is typically another disqualifier. Negative equity means that the car is worth less than the amount you owe on your loan. If you aren’t sure, you could check your car’s estimated value on the Kelley Blue Book website.
Do you have better credit or more stable finances now?
Consider whether your finances have improved since you took out your original car loan. If you’ve been diligent about paying your bills on time and keeping your credit card balances low, you might have a better credit score than you did when you originally took out the loan.
You may also have a higher income, which could further enable you to pay down your existing debt and improve your debt-to-income ratio (DTI). Your DTI is your total monthly debt obligation compared to your gross monthly income. Lenders use DTI to assess a borrower’s creditworthiness, or ability to manage debt. A lower DTI is generally better.
What are your short and long-term financial goals?
If you’re looking to refinance your car loan, it’s important to think about how new loan terms could affect your financial goals now and in the years to come. If you’re looking to make your payments more affordable in the short term so that you have some extra money in your pocket, don’t forget to think about the long-term impact as well. If you extend the length of your loan term in order to have lower monthly payments, are you okay with potentially paying more interest over the life of the new loan? Or would you prefer to reallocate money from the non-essential expenses in your budget to pay off the loan more quickly?
Thinking about a car refinance in a holistic way could help you weigh some of the pros and cons of taking on a new loan.
What are the terms of a refinance car loan?
With a refinance loan, you ideally want to secure better terms than you had with the original loan. Often, the type of lender can make a difference. Banks, credit unions and online lenders typically offer better terms than car dealerships, which may be an important consideration if you’re looking to work with a new lender.
Also, consider whether your original loan has a pre-payment penalty, which is a fee for paying off your loan early. Remember, refinancing a loan means you are paying off the old loan early and replacing it with a new loan. If the fee is considerable, refinancing may not save you very much money. If you decide to go ahead anyway, see if you can negotiate to not have a prepayment penalty on your new loan.
If you want to shop around, see if you can pre-qualify with a few different lenders. Pre-qualifying allows you to see the potential terms of a loan without harming your credit score with a “hard” check.
Ask the right questions and weigh your answers
Pausing to ask yourself a few important questions before refinancing your car loan may save you time, money or both in the long run. Consider all the factors that go into a car refinance, including your current financial standing, credit score, the value of your vehicle, your goals and the terms of the new loan.
Being thoughtful about this decision and seeing it as one piece of your broader financial picture could help you make the right decision for yourself.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of freeyork.org or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.