Refinance a Car Loan ‐ Is It Possible for You?
Is your car loan eating up your monthly budget and are you thinking about whether it is possible to refinance a car loan? Payments too high, or interest rate too steep? Or maybe your payments are fine, but your credit has improved since you took out the loan, and you feel you could be saving some cash with better rates. Whatever the reason, if you find yourself wondering when you can refinance your car loan, there are a few things you should know.
Is It Possible to Refinance a Car Loan?
The first thing you should do is to check your loan contract, and read the fine print carefully. If you only recently purchased your car and signed the loan agreement, it’s not uncommon that you’ll be slapped with an early termination fee if you refinance the loan too soon. In other words, the terms laid out in the loan might be designed to stay in place for anywhere from a year to three years, and if you refinance earlier than that, even with the same lender, you might end up paying a penalty.
Of course, just because there’s a penalty attached doesn’t mean it’s out of the question to go ahead with a refinance. If this is your situation, you have some number-crunching to do. Make sure that the money you’d save by refinancing is more than what you’ll lose to the fee, and make sure that the fee is something you can pay right now without serious hardship. Also ensure that the early termination won’t affect your credit report in a negative way before you proceed.
If there’s nothing in your contract preventing a refinance, then it’ll be up to you when it’s time to act. Some factors to consider that will help you know if it’s the right time to refinance include:
- Has your credit score improved? If so, how much? A drastic increase in your score, caused by resolving bad debts or clearing other negative items from your report, can be enough to trigger a refinance for a better rate.
- Has the market changed? If you first signed your loan during a time when the market was moving fairly quickly, chances are your lender wasn’t too desperate for your business; so your rate may not be as good as it would be during a time when borrowers were a bit more scarce. If the current market has banks offering great deals in an effort to bring in more business, you might be able to benefit.
- Has your financial situation changed? If your income has gone up or down significantly, or if you’ve paid off other debts or accumulated new ones, you might find that you don’t just want to refinance for a better rate: you need to refinance in order to continue making your payments. If this is the case, keep in mind that you may end up with a higher interest rate than on your previous loan. Many people in financial difficulty refinance in order to get lower monthly payments in exchange for a higher interest rate, and thus more money paid out overall. Sometimes such an action may be necessary to keep your loan from going into default; if this is your situation, it can’t hurt to look into your refinancing options.
The decision of when to refinance a car loan is yours, but you should base it on some careful calculations. Consider your own financial situation, the market, the time left on your loan, and the benefits and drawbacks of your current loan versus a new one before you act.