There are many benefits to refinancing your current auto loan. The most obvious and logical reason for most people to do this is a reduced interest rate, which can lower monthly payments depending on the term selected. In some instances depending on what kind of deal you got when you purchased your vehicle you may only be able to reduce the current interest rate, but not the payment itself. Still a great benefit if you were paying nine percent and your rate was reduced to five percent.
One of the key factors in determining whether you will be able to refinance your auto loan is the vehicles value. If you owe more than your car is worth, you can stop here. No financial institution will allow you to refinance a vehicle with negative equity. The solution to this problem if you do have a vehicle with negative equity is to pay additional money toward the principal balance of the loan. This will help counterbalance the negative equity. There are several pro’s to consider when deciding whether to refinance your existing auto loan. The first is a lower interest rate. It’s almost a no-brainer to refinance your existing auto loan for a lower rate than you have. However, you want to make sure the rate is at least two percent below the rate you currently have. Otherwise you really won’t see cost saving benefit.
Second, there is a possibility of a lower payment. This will of course depend on the term you select to refinance for and the amount of equity you have in the vehicle.For example, say you purchased a 2005 Honda Pilot when it was a year old. You selected a five year loan. Your payments are $504 at 7.50% interest. You are now in year three and only have about a year and a half before the vehicle is paid in full. You current loan balance is right at $10k. You decide you want to refinance to save money on not only the interest rate but the payment itself. You go to your credit union or bank and they say “Congratulations we were able to approve your auto loan refinance at a rate of 5.15%”. If you select a three year term your monthly payments will be reduced to around $278.00 per month. That’s an instant savings of over $200 per month to you.
The third reason is this. By lowering your monthly payment you also reduce your debt-to-income ratio or dti. Keep in mind most lenders like your dti to be no higher than 40% to approve a loan. Anything higher could result in your loan application being denied based on a high dti.
Are there any cons to refinancing your auto loan? There are a few. First if you are refinancing an auto loan with the same creditor they may charge a fee. For example you have an auto loan with Bank of America and you want to refinance it with them. Second, if you have any optional payment protection such as GAP insurance, credit life, or credit disability you may lose this coverage when refinancing if the new company you finance with doesn’t offer these services. The last con would be vehicle value. By extending the term of your loan you could deteriorate the value of your vehicle. The longer you own your car the higher the mileage. Mileage accounts for a huge reduction in value.
Overall if you can save in any instance whether it’s rate, payment, or both, it would definitely be worth the thought.