4 Reasons Refinancing Your Car Loan Makes Financial Sense
Refinancing your car loan can be one of the easiest ways to save money and improve your monthly budget. The average car refinance saves over $50 a month and reduces the interest rate by over 2%! Here are the top 4 ways refinancing your car loan can help you save money:
1. Lower your auto loan interest rate by ditching the dealer markup
If you arranged your car loan at the dealership, chances are you could do a lot better. Did you know that the dealer can mark up your interest rate without telling you? Most people don’t – and they definitely don’t know that the average markup on interest rates and other related products is over $1700. You can learn a lot more about markups – and figure out how much extra you paid – with our Outside Financial Markup Index.
So what can you do if your loan was marked up? Refinance. Getting stuck with a high interest rate does not have to be permanent.
2. Lower your auto loan interest rate by taking advantage of improved credit scores
Refinancing your car loan can also make financial sense when you’ve improved your credit score. Your credit score is an estimate of how likely you are to pay back your loan in full. The higher your credit score, the better, and the better your credit score, the lower your interest rate is likely to be. Your score can change frequently, as you pay off debts or continue paying your bills on time.
Your credit score makes a big difference in the auto interest rates you’re offered, even for the same car. If you have a 700+ credit score, you might qualify for a 4% auto interest rate, but if you have poor credit, you might only see rates above 14%. That difference could add up to thousands of dollars over the life of your car loan. If you’ve managed to improve your credit score since you took out your original car loan (congrats!), you can take advantage by refinancing now.
3. Lower your monthly payments by refinancing to a new car loan
We get it. Sometimes you need to free up some room in your monthly budget. You need to invest a bit more in your new business, your spending is up, or your income is down. You can free up some cash each month by extending your loan term. The longer the loan term, the lower your monthly payment, assuming your interest rate stays the same.
By extending your loan term by 6 or 12 months, you can lower your monthly payment because you’re stretching out the number of payments you’ll make over the life of the loan. That can be a big relief at the right time. We always recommend borrowing for the shortest term you can to save on interest expense over the life of your loan. But we understand there are times when lowering your monthly payment to extend your loan term makes sense.
4. Skip a payment by refinancing your auto loan
Skipping a car payment is very common when refinancing an auto loan. Your new car payment won’t be due to your lender for 45 days, which could mean some nice breathing room for you and your budget.
