Refinancing a car loan can be a great way to save money, sometimes hundreds of dollars a month. Everybody likes to save cash. A lot is better, but even saving just a little feels really good. We especially like saving cash when it doesn't require giving anything up. Then your savings feel like found money. And you pretty much won't be giving up anything for it, right? So, why isn't everybody out there doing it? For one thing, it does take a bit of research and, to be honest, it doesn't always make sense to refinance. Plus, there are some cases where you simply can't do it. Nevertheless, if you haven't considered the possibility, it might be time to refinance.
Am I Allowed to Refinance?
The simple answer is yes. Unless there is some language in your loan agreement that doesn't allow you to pay it off early (which is highly doubtful), then you should be able to refinance your loan. And if doing it is in your best interest, there is likely no reason for you to wait no matter how old or new your loan is. It's very important, though, to read your loan agreement carefully and take a good, strong look at your individual circumstances before refinancing. You see, it's one thing to know that you can refinance your car, it's quite another to know if you should.
When May I Not Be Able to Refinance?
If you have had your loan for only a short time, it is likely that you have only been paying off the interest, not the principal. In such a case, you are probably in a negative equity situation, meaning that you owe more on the loan than the vehicle is worth. As a result, it may be difficult to find a lender who will refinance your car. The same may be true if your credit score has dropped since taking out the initial loan. It may still be possible to find a new loan, but it's probably going to be tougher than before.
To save money, of course, but saving money can mean different things to different people. In the case of refinancing a car loan, there are several ways of approaching the issue. First, some people are looking to lower the overall cost of their loan. They see a drop in current interest rates and figure it's time to save. They might be interested in using those lower rates to get into a loan with a shorter payback period, moving from a five-year to a three-year loan, for example. In doing so, they may not see a drop in their monthly payments (and may even see an increase), but the shorter loan period can mean significant savings over the course of the loan. Whatever the reason, the key is a lower interest rate, and that rate drop can result not only from general economic conditions but also from a positive change in an individual borrower's circumstances. Many people find that their personal credit score has improved, sometimes significantly, since first taking out their car loan.
There are also folks out there who are interested in refinancing primarily to lower their monthly payments whether or not doing so will lower the overall cost of the loan. This is usually the case for those who have run into financial problems of one sort or another and find themselves needing to get by on less in the short-term. In some ways, this is the flip side of moving from a longer to a shorter loan. Here, a borrower may want to extend the loan period for the immediate monthly savings. If that's your reason for refinancing, however, be very careful. You will likely pay out a lot more in total by the completion of the loan and end up with an older vehicle with a much lower resale value.
How to Refinance
The auto refinancing process is relatively easy, at least compared to refinancing a home or obtaining an initial car loan. You need to have a clear understanding of your car's current value, the amount you owe on your loan, your credit score, and current loan rates. Then it's all about putting in a little time and effort to find the best deal.