If you have an auto loan and want to save money, consider refinancing. Loan refinance is when an existing loan is given new terms and conditions that are better suited to your needs, with either your current lender or a new one.
Understanding how refinancing works and what the benefits could be can help you decide if refinancing your auto loan might be the right solution for you.
1. Get a Lower Interest Rate
An interest rate is how much you have to pay your lender based on the principal, or the amount you were loaned. This is usually expressed as a percentage.
For example, if you borrowed $1,000 and had an interest rate of 3%, your interest would be $30.
Interest builds up the longer it takes for you to pay your loan off, usually year-by-year.
By refinancing, you can lower the interest rate on your loans and owe less money overall, because a lower interest rate means interest builds up at a slower speed.
Quick Pit Stop: Before refinancing, it may benefit you to raise your credit score. Your credit score is a number based on your credit report, and determines your creditworthiness, or how likely you are to pay off loans.
People with lower credit scores usually receive higher interest rates on their loans, because lenders see them as more of a risk and want to protect themselves from potential losses if the borrowers are not able to pay off their loans.
If you want to save money with a lower interest rate on your auto loan, having a higher credit score is a vital first step.
You might consider using Experian Boost to instantly raise your Credit Score by getting credit for bills you already pay. Credit Union 1 is not affiliated with Experian Boost, but this tool can help improve your credit score and the interest rates of future loans.
2. Compare at Least Three Different Offers
When shopping for anything, whether it is groceries, electronics, or car loans, it’s important to make sure that you are getting the best product possible.
Many lenders allow you to get preapproved for your auto loan. Preapproval means that you can get a rate quote that tells you your interest rate ahead of time. Just know, preapproval requires a hard credit inquiry, or credit check, which will briefly lower your credit score.
Also, pay attention to the estimated term, fees, and monthly payment listed on your preapproval, and decide if they fit your budget.
- Your Loan Term is how long it will take for your loan to be paid off based on your required payments.
- Fees are costs included with your loan such as an origination fee, which is charged when you receive a loan.
- Your Monthly Payment is the minimum amount you are required to pay towards a loan every month.
Compare at least three different loans and choose the one with the interest rate, monthly payment, and term length that are best for you.
3. Check for Hidden Fees
Car loans frequently come with hidden charges such as prepayment penalties, origination fees, and more.
A prepayment penalty means you are charged when a loan is paid off early. If your current loan has a prepayment penalty, refinancing will likely cost you.
Check if both your current and prospective loans have hidden fees before you decide to refinance.
4. Opt Out of Extra Insurance
Auto loans frequently have additional, optional insurance policies such as GAP, extended warranties, credit insurance, and more. Study the insurance plans that you are offered and decide if the coverage is worth the cost.
If you want to save the most money possible, opting out of extra insurance is your best bet.
5. Get a Shorter Loan Term
While a shorter-term loan may mean your monthly payments increase, you will pay less money in the end, because interest will have less time to build up.
If larger monthly payments make sense with your budget, a shorter loan term will save you money by nipping interest in the bud.
If you decide to refinance your auto loan, Credit Union 1’s competitive rates and committed team members will help you get the most out of this process, hassle-free. Learn more here.
