Is your car loan payments too expensive? You’re not the only one having a hard time paying your monthly bills. According to the Washington Post¹, a record 7 million Americans are 90 days or more behind on their car loan payments.
But there’s a way to better manage your car loan. Refinancing your car loan can make a huge financial difference – and save you a lot of money.
By refinancing your car loan, you can apply for a different loan. This can result in lower interest rates, lower monthly payments and even a shorter loan term. If you’re considering refinancing your car loan, here are three great reasons why you should.
1. You Pay a High Interest Rate on Your Loan
The interest rate on your car loan depends on several factors. Your credit score and current interest rates are two of the most important.
If you’ve a poor credit score or weak credit history, you probably just qualified for higher interest rates when you took out your car loan. Over the years of repayment, you’ll then pay thousands of additional dollars in interest alone.
In addition, interest rates were much higher just a few years ago than they’re today. As interest rates change over time, a loan with an interest rate that originally sounded very good can become unattractive.
According to LendingTree², if you bought your car at an interest rate of 6 percent or more, it’s time to refinance a loan. Interest rates change frequently, but in 2019, rates are dropping – currently a 36-month APR is as low as 1.85 percent³.
This means that by refinancing and getting a lower interest rate, you can lower your interest rate by 5 percentage points or more.
2. Your Loan Term is Too Long
Another factor that affects both your monthly payments and how much you spend on your vehicle in the long run is the term of the loan. For car loans, 3- and 5-year terms are common, but many car buyers are now opting for longer terms of 7 years or more.
A longer term means you’ll have to spend more money throughout the life of the loan. You’ll pay more interest, which means you’ll have to pay more than the original purchase price.
Also, the term of your loan determines how much you pay each month. If you chose a shorter loan term, your monthly payments are likely to be high. If you change the loan term and extend the loan by a few years, you can lower your monthly costs, even if you pay more interest.
With refinancing, you can change the term of your car loan. As Credit Karma⁴ explains, refinancing is worth it if you need a longer loan term to lower your monthly payments. It’s also a good idea if you don’t mind paying a little more each month for a shorter loan term.
3. Save Money
The most important – and best – reason to refinance your car loan is to save more money. With high interest rates and a long loan term, you’ll end up spending thousands of dollars. But with different loan terms, you could keep all that extra money in the bank instead.
Even if you can lower your interest rate by just a few percentage points, it can make a big financial difference. Take this example from LendingTree⁵: by refinancing a 5-year, $25,000 loan with a 7.75% interest rate and a 4-year term at a 4.75% interest rate, you could save $30 per month. That adds up quickly over 4 years.
And changing the loan term makes the same difference. Even with the same interest rate, shortening the loan term by a year or more will significantly reduce the amount you pay.
Are you ready for a debt restructuring? These are the best refinancing options
Are you ready to make your car loan more affordable? You can start the refinancing process at any time – and you can apply online. But before you decide to refinance, choose a company that offers terms that are right for you.
When refinancing your car loan, you should look for an option that fits your credit score and loan amount. You should also look for the best possible interest rate.
Below are just a few of the best refinancing companies you can find today.
OpenRoad Lending
Qualified Loan Amounts: $10,000 to $100,000.
Available interest rates: From 1.9 percent to 24.9 percent⁶
Credit score range: 550 to 850
LendingClub
Qualified loan amounts: $5,000 to $55,000
Available interest rates: From 3.99 percent to 24.99 percent⁷
Credit score range: 510 to 850
Autopay
Qualified loan amounts: $2,500 to $100,000
Available interest rates: From 1.99 percent to 17.99 percent⁸
Credit score range: 600 to 850
Remember: Before you refinance your auto loan, you need to do your homework. You should know what the current interest rates are – and how low they could be. It’s also important that you research different refinance companies to find the best option.
Refinancing your car loan should ease your financial situation and make your loan more affordable. With the right knowledge, you can find a company that will help you save money on your new car.
