Interest rates are still hovering near historic lows for mortgages, but did you know that those same super low rates also may make it wise to refinance your car loan?
Here's how to decide if you would have a cost advantage and benefit:
- Your current interest rate is high. When you first bought your car, you may not have qualified for the best rate. Or, since you originally took the loan, your credit score may have improved, entitling you to a better, lower rate. In some cases, rates in general may be lower and can be applied to your balance.
- You want to lower your monthly payments. A lower interest rate can reduce your monthly payments without increasing the term of the loan.
- You want to pay your loan off sooner. If you qualify for a lower interest rate, you can continue to make the same monthly payments and pay off the loan faster than you originally planned because more of the monthly payment will be applied to principal.
Sounds great, right? For some people, it's a beneficial financial choice. One way to decide is to use a calculator tool to estimate your potential savings.
But even if you will be potentially reducing payments, a few things can stand in your way:
- Age of your car. In general, the newer, the better. To your lender, an older car has lower collateral value so you may not have an option to refinance the loan balance if it exceeds the vehicle's current value.
- Prepayment penalties. Check that your current lender doesn't require you to pay a penalty for paying off your loan early.
- Other fees. State re-registration fees can vary significantly. Check with your state for the amount to be sure refinancing is worth as much to you as you expect. Also check for any fees your new lender will charge you for the refinance as those fees will impact the value of the new loan.