Taking out a car loan to purchase a new or used vehicle makes sense for most people. Paying the total price for a car, truck, or SUV is not within many consumers’ budgets. However, when time passes and circumstances change, some may question whether the loan is the right one for them. Refinancing stands as an option for those borrowers, and there might be times when refinancing seems like a good idea.
Refinancing involves taking a new loan to pay for a current one. A would-be borrower might wonder what the benefits are. Switching to a new loan with the same terms would make little sense. No matter. Refinancing borrowers typically choose loans with more preferable terms, such as a lower annual percentage rate. Something usually prompts a borrower to refinance, and the reasons for the decision might work in the borrower’s favor. Others may wonder if refinancing is right for them. Reviewing options and reasons for refinancing could lead a borrower to make a personally appropriate decision.
When High Interest Rates Sting
Not every borrower qualifies for reasonable interest rates. Namely, someone with a troubled credit history might look at interest rates far above average. Since the person needs a car, accepting the financial pain of higher rates becomes unavoidable. Auto loan refinancing might provide the escape hatch for those struggling with excessive interest rates. Cutting an interest rate down from 6% to 4% could make the overall purchase price much less expensive.
When Dealing with a Monthly Budget Strain
Higher interest rates usually result in higher monthly minimum payments than those derived from low-interest loans. Refinancing may help the borrower reduce a monthly car payment. According to Lantern by SoFi, “applicants could qualify for a lower interest rate through refinancing—which could mean lower monthly payments and saving money in the long run.” When a monthly payment drops by $50 or $100, the money could go towards other budget costs, such as food, gasoline, and more. The funds may go into long or short-term savings, as well. The borrower likely has many better uses for the money than paying more per month on loan than necessary.
When Your Credit Score Improves
One reason why a borrower could suffer from higher interest rates is that their credit score is low. Poor credit scores often force troubled borrowers to accept “bad credit” auto loans at less-than-desirable terms. Ironically, making timely payments on a car loan may improve a credit score. Once the credit score improves, it may become possible to find a better deal with refinancing. Keeping track of a credit score helps with timing the decision to refinance. Someone who sticks with a bad credit auto loan for several months after becoming eligible for a better rate could lose money. Reviewing a credit report provides a picture of the current situation.
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Refinancing an auto loan provides a way to escape higher interest rates and save money. Certain underlying factors could help you refinance an old loan and choose an appropriate one.