Refinancing a mortgage is often a wise financial move. So is refinancing your auto loan. Yet, unlike a home refinance, many consumers are unaware that this option exists. Here’s why an auto loan refinance can save you money immediately – and down the road.
The average price of a new car has climbed to more than $40,000 and unless you’re willing to buy something with many years and miles on it, you’ll likely still pay a lot for a used car. Some consumers opt for a six- and seven-year loan to try to keep their monthly payment affordable, but end up spending a great deal more on the car over the life of the loan than they had planned.
Unfortunately, depreciation is usually a guarantee of vehicle ownership. When you drive your new car off the lot, it typically loses value almost immediately. Combined with higher loan amounts and longer terms, that depreciation can put you underwater – meaning you owe more than your vehicle is worth. When underwater on the loan, you’ll likely lose money if you sell or trade in your car, or if it’s totaled in an accident prior to paying off the loan.
An auto loan refinance could offer relief from these negatives, with benefits such as:
- A lower interest rate: Even a small reduction in your interest rate could make a difference. For example, a $30,000 loan at 7 percent over five years results in $5,642 in interest before the loan is paid off. Reducing the rate to 6 percent saves $843 over the life of the loan. And if you can qualify for an even lower rate, the savings will be even greater.
- A lower monthly payment: A lower interest rate could result in a lower monthly payment and more money in your pocket. You can use that extra cash to pay down other debt, invest in your retirement, or simply add a little more spending money to your budget.
- A shorter term: Knocking a year or two off of the loan term can save hundreds, or even thousands, of dollars in interest. With today's low interest rates, you might be able to refinance into a payment that isn’t much more than what you have now, and you’ll receive your title sooner.
- More lending power: Debt-to-income (DTI) ratio measures how much you owe compared with how much income you earn. A big monthly car payment could increase your DTI and affect your ability to secure other loans, such as a mortgage. Reducing that auto loan payment can open up more options.
- More flexibility: Selling your car for a fair price gets complicated if you’re underwater on the loan. Refinancing speeds up paying down the principal you owe on your vehicle, giving you the flexibility to sell or trade in the vehicle without losing money on the deal.
Is refinancing worth it?
1st United doesn’t charge for an auto loan refinance. There might be some incidental fees for transferring the title but for the most part, refinancing is quick and easy for the vehicle owner.
However, if an auto refinance won’t result in any noticeable savings, you might be better off sticking with your current loan. As you decide, consider your financial goals. Are you hoping to free up extra cash every month or pay off your car as soon as possible? How long do you plan on keeping your vehicle?
To help you decide, try using our loan payment calculator to determine how much you might save with a refinance. Information you’ll need to use the calculator includes:
- Your current interest rate
- Monthly payment
- Amount owed
- Months remaining on the loan
If the numbers look promising, give us a call and we can go over your options. We can also run those numbers for you and provide a recommendation as to whether the refinance is worthwhile. Again, interest rates are low and should be for some time so if you feel burdened by your current auto loan, now is a good time to do something about it.
Your next car, your next loan
Americans owe $1.36 trillion of debt on their vehicles. That sounds excessive but for many people, a monthly car payment is unavoidable. Although consumers tend to research the best car and the best price, they don’t always apply the same effort to finding the best loan. Whether you’re borrowing for a new or used vehicle or refinancing your current one, don’t settle for a high interest rate or for the financing the dealer is offering. Do your homework to find the loan that best serves your financial goals.