Ever had a car that leaked oil? It’s like pouring your money down the drain. You top off the oil one day, and before you know it your engine’s about to run dry again.
Every budget has leaks like that—monthly payments we set and forget that takes the money right out of our checking accounts. Things change. It often pays to take a few moments to review your finances for areas where you might be overpaying.
When it comes to leaky budgets, vehicles can be a common culprit. Many car owners could save hundreds or even thousands of dollars by shopping around for the best auto loan rate, insurance provider or mechanical breakdown protection. Take an auto loan for instance, six in 10 Americans with auto loans don’t know how much their current interest rate is. Further, many people don’t think about continuing to check rates or refinance to a better rate after their loan is established.
Here are four reasons you might want to consider a refinance:
1. Interest rates may have dropped.
When you take out an auto loan, you get locked into an interest rate for several years. But interest rates are constantly changing. If you bought your car when rates were high, you might be able to get a lower rate today.
Also, your financial institution can make a difference. Credit unions typically offer auto loans at interest rates 1 to 2 percentage points lower than banks. For example, financing a $30,000 new car at a credit union can save you an average of $1,019 over the life of your loan.
2. Your credit may have improved.
Did you have less than stellar credit when you bought your car? A lot of people do—and they pay higher interest rates. In fact, more than one in five new car loans now go to subprime borrowers.
Even if you had good credit at the time of your loan, your credit score might have improved since then. Paying down debt, buying a home, or even just getting a few years of successful car payments under your belt can bump up your score.
A credit score of 720 can net you a top-notch interest rate when you refinance. Have you checked yours lately?
3. Your monthly payment is too high.
When you need to tighten your budget, your car payment is one of the first things you should look at. Refinancing at a lower interest rate not only saves you money in the long term, but it can help drive down your monthly payment. If you’re leaking money on unnecessarily high interest, an auto loan refinance can give your budget room to breathe.
If you’re really feeling the squeeze, you can even extend the life of your loan to drop your payment even more. You’ll rack up more interest in the long run, but at least you won’t wreck your credit by missing car payments.
4. You want to pay off your loan early.
Eager to get out of debt? If you play your cards right, refinancing can shorten the life of your loan.
Let’s say you snag a lower interest rate but keep making the same monthly payments. That means you’ll be paying the principal down faster, which can shave months or even years off your loan. Just make sure your new loan doesn’t come with a prepayment penalty.
If you’ve got an auto loan, chances are you’re leaking money unnecessarily. As long as your current loan doesn’t have a prepayment penalty, refinancing can help you save—both now and down the road.