Should You Refinance Your Car Loan?
If you’re paying an above-average rate on a car loan, perhaps because your credit was spotty when you originally financed the car or you simply signed on for a bad deal, now may be a good time to refinance.
As with the interest rates for fresh cars, these days you can find refinancing rates that are very attractive, three percent or lower. If you’re paying more than that, refinancing might trim hundreds, even thousands of dollars from the cost of your loan and reduce your monthly payment.
What’s more, unlike refinancing a mortgage, refinancing an auto loan involves no closing costs, appraisal fees, or other hoopla, says Greg McBride, chief financial analyst at Bankrate.com.
“If you are going to refinance, now is the time to do it, given that interest rates are rising,” McBride says.
How Much You Can Save
To see the potential savings, Michael Saccucci, Consumer Reports director of statistics, evaluated different refinancing scripts. The refinancing rate you can get depends on many factors, including your credit score, your car’s age, and how long you’re refinancing for.
In one example, using the lowest refinancing rate we could find—2.24 percent—Saccucci found that you could trim about $Two,700 off the total cost of a six-year, eight percent car loan after two years. And you’d cut your monthly payment by $56 for the remaining forty eight months.
You can even benefit significantly if your current loan is charging less than eight percent. If you refinanced a six percent loan, the total savings would be $1,712 and you’d reduce your monthly payment by almost $36. Even saving just one percentage point, from Three.24 percent to Two.24 percent, by refinancing would trim $436 off the cost of the loan and reduce your monthly payment by about $Ten, Saccucci found.
Of course, all this assumes that you have the excellent credit rating needed to qualify for the lowest rate. If you don’t and refinanced the eight percent loan at, say, Two.99 percent—a rate presently available to people with just “good” credit ratings—you’d still save a lot, cutting the total cost by $Two,361 and trimming your monthly payment by almost $50.
You could also reduce the monthly payment by extending the refinancing period beyond the remaining forty eight months. But that would eat up some or even all of the total savings. And it can leave you having to make payments on an aging car that may require expensive repairs, McBride says.
That’s why you should consider extending your existing loan only as a last resort, perhaps to avoid missing loan payments, which can ding your credit score or even lead your lender to repossess your car, says Bruce McClary, vice president of communications for National Foundation for Credit Counseling.
What to Do
Go after these tips if you think you might benefit from refinancing your car loan.
Ask your bank for a rate reduction. Your existing lender might lower the rate on your current loan if you shove hard enough, McBride says. Lenders often won’t finance loans you primarily got from them, but it’s worth a attempt.
Compare rates. Consumer Reports found a broad range of refinancing rates on lender websites, from Two.24 percent to as much as Four.63 percent. Reminisce that advertised rates typically apply only to customers with excellent credit, McClary says. If you’re behind on your current loan, your rates would most likely be higher, or your finance application might not be approved, he says.
Check the fine print. Not all car loans qualify for refinancing. For example, to refinance at Capital One your car must be no more than seven years old. And the amount you owe on your loan must range from $7,500 to $40,000. Also check for any fees, McBride advises.
Look for prepayment penalties. Albeit the practice is uncommon, some lenders charge a prepayment penalty if you pay off your current loan early, which can reduce your savings if you refinance, McClary says.
Find out whether refinancing is worth it. Determine how much you might save by refinancing. If you’re already paying a low interest rate on your loan, less than five percent or so, you most likely won’t benefit much, if at all, Saccucci says. There are several online calculators, including one from Bank of America and another from NerdWallet, that you can use to figure your savings.
Don’t put it off. The earlier you refinance the more you’ll save on the cost of the loan. In the $30,000 loan example, refinancing an eight percent loan to Two.24 percent in the third year instead of after twenty four months would reduce the $Two,700 savings by more than $1,100.
Should You Refinance Your Car Loan? Consumer Reports
Should You Refinance Your Car Loan?
If you’re paying an above-average rate on a car loan, perhaps because your credit was spotty when you originally financed the car or you simply signed on for a bad deal, now may be a good time to refinance.
As with the interest rates for fresh cars, these days you can find refinancing rates that are very attractive, three percent or lower. If you’re paying more than that, refinancing might trim hundreds, even thousands of dollars from the cost of your loan and reduce your monthly payment.
What’s more, unlike refinancing a mortgage, refinancing an auto loan involves no closing costs, appraisal fees, or other hoopla, says Greg McBride, chief financial analyst at Bankrate.com.
“If you are going to refinance, now is the time to do it, given that interest rates are rising,” McBride says.
How Much You Can Save
To see the potential savings, Michael Saccucci, Consumer Reports director of statistics, evaluated different refinancing scripts. The refinancing rate you can get depends on many factors, including your credit score, your car’s age, and how long you’re refinancing for.
In one example, using the lowest refinancing rate we could find—2.24 percent—Saccucci found that you could trim about $Two,700 off the total cost of a six-year, eight percent car loan after two years. And you’d cut your monthly payment by $56 for the remaining forty eight months.
You can even benefit significantly if your current loan is charging less than eight percent. If you refinanced a six percent loan, the total savings would be $1,712 and you’d reduce your monthly payment by almost $36. Even saving just one percentage point, from Three.24 percent to Two.24 percent, by refinancing would trim $436 off the cost of the loan and reduce your monthly payment by about $Ten, Saccucci found.
Of course, all this assumes that you have the excellent credit rating needed to qualify for the lowest rate. If you don’t and refinanced the eight percent loan at, say, Two.99 percent—a rate presently available to people with just “good” credit ratings—you’d still save a lot, cutting the total cost by $Two,361 and trimming your monthly payment by almost $50.
You could also reduce the monthly payment by extending the refinancing period beyond the remaining forty eight months. But that would eat up some or even all of the total savings. And it can leave you having to make payments on an aging car that may require expensive repairs, McBride says.
That’s why you should consider extending your existing loan only as a last resort, perhaps to avoid missing loan payments, which can ding your credit score or even lead your lender to repossess your car, says Bruce McClary, vice president of communications for National Foundation for Credit Counseling.
What to Do
Go after these tips if you think you might benefit from refinancing your car loan.
Ask your bank for a rate reduction. Your existing lender might lower the rate on your current loan if you shove hard enough, McBride says. Lenders often won’t finance loans you primarily got from them, but it’s worth a attempt.
Compare rates. Consumer Reports found a broad range of refinancing rates on lender websites, from Two.24 percent to as much as Four.63 percent. Reminisce that advertised rates typically apply only to customers with excellent credit, McClary says. If you’re behind on your current loan, your rates would very likely be higher, or your finance application might not be approved, he says.
Check the fine print. Not all car loans qualify for refinancing. For example, to refinance at Capital One your car must be no more than seven years old. And the amount you owe on your loan must range from $7,500 to $40,000. Also check for any fees, McBride advises.
Look for prepayment penalties. Albeit the practice is uncommon, some lenders charge a prepayment penalty if you pay off your current loan early, which can reduce your savings if you refinance, McClary says.
Find out whether refinancing is worth it. Determine how much you might save by refinancing. If you’re already paying a low interest rate on your loan, less than five percent or so, you very likely won’t benefit much, if at all, Saccucci says. There are several online calculators, including one from Bank of America and another from NerdWallet, that you can use to figure your savings.
Don’t put it off. The earlier you refinance the more you’ll save on the cost of the loan. In the $30,000 loan example, refinancing an eight percent loan to Two.24 percent in the third year instead of after twenty four months would reduce the $Two,700 savings by more than $1,100.