For many, the idea of redoing vehicle loan paperwork is a tedious process. But it doesn’t have to be. With rates in the current financial market dropping, it is the perfect incentive to consider refinancing your car loan.
So, when and why should you consider refinancing your car loan? The answer to this question typically revolves around saving money. Higher interest rates mean higher loan payments for borrowers. With these kinds of rates, it also means more of your payment is going toward the interest rather than the principal of your loan each month. When you refinance and receive a lower interest rate, you not only save money each much but you actually pay off your loan faster depending on how you set it up.
You may qualify for a lower auto loan interest rate for a few reasons. One is that the rates are naturally going down with the market but many people also find themselves with an improved credit score. By demonstrating that you can pay on time for six months or more, your score should increase and qualify you for a better rate.
Military families should also consider looking into the Servicemembers Civil Relief Act to see if it can assist them in lowering any high interest rates. The act forces lenders to reduce rates for debts (including auto loans) to at least 6%. Although lenders can challenge this, most don’t. This process is a little easier than refinancing the loan and requires simply asking to speak to your lenders SCRA representative to get the ball rolling.
It’s important that borrowers understand the process and know there still may be some cost involved in refinancing. Joe Pendergast, Vice President of Consumer Lending for Navy Federal Credit Union, weighed in on fees associated with refinancing vehicle loans.
“Be aware of an application fee the new lender may charge and a prepayment penalty you may incur from the original lender if you pay off the loan before your agreement ends. When refinancing, there could be lien placement and registration fees from the DMV, which typically range from $5-$100, depending on the state,” he explained.
Maybe you’ve decided that you are ready to refinance and it is your best option. The first step should be to utilize an auto refinance calculator to see if you can personally benefit from refinancing your auto loan. Do some research on current rates offered and plug in your information. It’s also important to know that rates are lower on newer vehicles, so waiting too long to refinance may cost you more in the long run.
“It’s more advantageous to refinance early into the loan because that’s when you’re paying the most interest,” Pendergast said.
Refinancing may offer some unexpected benefits too. For example, Navy Federal Credit Union gives new borrowers that move their auto loan to them $200. They also don’t charge an application fee, unlike some lenders. Do shop and compare various military lenders before making a decision.
“Refinancing may not be right for everyone, and sometimes it can prove more costly down the road. For example, extending your loan term with the refinance beyond the original term with the old lender, could have you paying more interest over time, even though the monthly payment might be lower. In other words, try to keep the new loan term the same as what the remaining loan term is on your existing loan,” Pendergast said.
Making the decision to refinance your auto loan doesn’t have to be completely painful or complicated. With the interest rates lower than ever and the added perks from lenders, now may be the best time to refinance. Examine your budget today and see if refinancing your auto loan works for you.
For more stories like this, including how to save, build retirement, navigate insurance and more, download our 2020 Military Money Guide.
