Is it time to refinance your auto loan?
My senior year in college, I traded my beloved high school junk car for a 1993 Honda Civic. I didn’t know where my first job might take me, and I needed a car I could count on to make the journey.
It wasn’t fancy. There was no air conditioning and I had to roll down the windows by hand, but everything worked. My little Honda breezed through the cross-country trip to Nashville, where I’d landed my first gig.
One month into the sweaty Tennessee summer, however, and it became clear that rolling down the windows wasn’t going to cut it. I needed air conditioning, and I needed it fast.
I traded up for a newer model with more amenities. While my daily commute became infinitely more comfortable, the monthly payment was higher than I was comfortable with. Fortunately, after a few years of managing the payments, I had built up enough credit to qualify for a lower interest rate. I found out I could refinance my car, lower my payment, and pay less over the life of my auto loan.
What I learned from the experience is that life is always carrying us forward, even when it feels like we’re staying in one place. Circumstances change, and so do our vehicle needs. Wherever you’re at in life, it’s worth asking whether your auto loan is giving you the best deal you can achieve in the present moment.
It might be time to refinance if:
Interest rates have dropped
Interest rates have hit record lows over the past couple of years. If you locked in your auto loan when rates were higher, refinancing could lower your minimum payment and help you pay off your car faster. Use our loan calculator to estimate how much even a 1 percent difference could save you. Refinancing when rates are low is a smart financial move if the potential savings outweigh the loan fees.
Your credit has improved
Since your credit rating is one of the factors that determine your interest rate, a bump in your credit score could qualify you for better loan terms. Paying down debt, buying a house, or simply making loan payments successfully over time can positively impact your credit. Check your credit report because you may be building up credit faster than you realize. A FICO score of 720 or higher typically qualifies you for the best auto loan rates.
You have a longer loan term (5-8 years)
Many car buyers opt to lower their monthly payment by extending the life of their loan. The downside is that they end up paying more interest in the long run. If you chose a longer loan term because it made sense at the time, consider whether that’s still true today. Refinancing your loan at a lower rate could allow you to shorten your term without significantly increasing your monthly payment. It’s worth running the numbers, even if you haven’t had your loan very long. Because you pay more interest up front, it’s often better to refinance sooner rather than later.
When is not a good time to refinance?
Refinancing isn’t for everyone. If your existing loan has a prepayment penalty that would negate the potential interest savings, or if refinancing would extend the life of your loan, it’s probably not the best option.
If you’re not sure whether refinancing your auto loan makes financial sense for you, our team is here to help. Our loan officers can go over the numbers with you and help you determine the best course of action. All you need is a monthly statement showing your interest rate, remaining balance, and payoff amount to start comparing auto loan terms.
A lot can change in five to eight years. Think the time is here to refinance your vehicle? Our team at OCCU is here to help. Discover our great rates and how refinancing can give more savings back to your wallet.
