Are your auto loan payments too expensive? You’re not the only one struggling to pay your monthly bills. According to the Washington Post¹, a record-breaking 7 million Americans are behind on auto loan payments by 90 days or more.
But there’s a way to make your auto loan more manageable. Refinancing your auto loan can make a huge financial difference – and it could save you a ton of money.
Refinancing your auto loan lets you apply for a different loan. It could result in lower interest, smaller monthly payments, and even a shorter loan term. If you’re considering refinancing your auto loan, here are three great reasons you should do so.
1. You’re Paying a High Interest Rate on Your Loan
The interest rate on your auto loan depends on a few different factors. And your credit score and current interest rates are two of the biggest.
If you have bad credit or a weak credit history, you likely only qualified for higher interest rates when you got your auto loan. Over years of repayment, that leaves you paying thousands of additional dollars in interest alone.
Additionally, just a few years ago, interest rates were much higher than they are today. As interest rates change over time, a loan with an interest rate that originally sounded great could become unappealing.
According to LendingTree², if you purchased your car and got an interest rate of 6 percent or higher on your loan, it’s time to refinance. While interest rates change often, in 2019 rates are dropping – currently, a 36-month APR is as low as 1.85 percent³.
That means refinancing and getting a lower interest rate could slash your interest rate by 5 percentage points or more.
2. Your Loan Term is Too Long
Another factor that affects both your monthly payments and how much you spend on your vehicle in the long run is the loan term. Auto loans are common in 3- and 5-year terms, but many car buyers are now opting for longer terms of 7 years or more.
And a longer loan term means you’ll wind up spending more money over the lifetime of the loan. You’ll pay more interest, which will cause you to pay more than the original purchase price.
Additionally, your loan term determines how much you pay every month. If you opted for a shorter loan term, your monthly payments are likely big. Changing the loan term and adding a few years onto the loan can reduce your monthly cost, even if you do pay more in interest.
Refinancing allows you to change your auto loan term. As Credit Karma⁴ explains, refinancing is well worth it if you need a longer repayment term to lower your monthly payments. It’s also a smart idea if you don’t mind paying a little more each month for a shorter loan term.
3. You Want to Save Money
The biggest – and best – reason to refinance your auto loan is to save more money. With high interest and a long loan term, you’ll end up spending thousands of dollars. But with different loan terms, you could instead keep all that extra money in the bank.
Even if you’re only able to slash your interest rate by a few percentage points, it can make a huge financial difference. Take this example from LendingTree⁵: refinancing a $25,000 5-year loan with 7.75 percent interest down to a 4.75 percent interest rate for 4 years would save you $30 per month. That adds up quickly over 4 years.
And changing the loan term will make the same difference. Even at the same interest rate, shortening the loan term by a year or more will greatly reduce the amount you pay.
Ready to Refinance? These Are the Best Refinancing Options
Are you ready to make your auto loan more manageable? You can start the refinancing process any time – and you can apply online. But before you decide to refinance, it’s important to choose a refinancing company that offers terms that work for you.
When you refinance your auto loan, you’ll want to look for an option that fits your credit score and your loan amount. You also want to seek out the interest rate possible.
The following are just a few of the best refinancing companies you can find today.
Qualifying Loan Amounts: $10,000 to $100,000
Available Interest Rates: From 1.9 percent to 24.9 percent⁶
Credit Score Range: 550 to 850
Qualifying Loan Amounts: $5,000 to $55,000
Available Interest Rates: From 3.99 percent to 24.99 percent⁷
Credit Score Range: 510 to 850
Qualifying Loan Amounts: $2,500 to $100,000
Available Interest Rates: From 1.99 percent to 17.99 percent⁸
Credit Score Range: 600 to 850
Remember, before you refinance your auto loan, you need to do your homework. You should know what current interest rates are – and how low they might be. It’s also important to research different refinancing companies to find the best option.
Refinancing your auto loan should make your financial situation easier and your loan more affordable. With the right knowledge, you can find a company that will help you save money on your new car.