I’ve never been enamored with auto loans since they don’t receive any favorable tax treatment and the underlying asset tends to depreciate, rather than appreciate over time. I prefer to save up for an auto purchase rather than finance it. However, if you already have an auto loan, you may be able to lower the interest rate and payments on your existing auto loan through an auto refinance. Contrary to popular belief, auto refinancing is fairly quick, easy, inexpensive, and can save you thousands of dollars.
What is an Auto Refinance?
An auto refinance is the replacement of an older auto loan with a new auto loan that has different terms. The existing loan is paid off by the opening of the new auto refinance loan, and the prior loan balance is carried over to the new auto loan.
Many people pursue auto refinancing in order to obtain a lower interest rate on their loan due to improved credit or lower overall interest rates.
Why I Love Auto Refinancing
Many people mistakenly believe that an auto refinance is similar to a mortgage refinance. They know that mortgage refinances tend to involve high fees, a ton of paperwork, and seem to drag on forever.
The auto refinance process is much less arduous and much quicker than a mortgage refinance. Auto refinancing applications may only take you a few minutes to fill out and fees are generally much lower too.
There may be some loan and title fees assessed, which should definitely be considered when determining whether or not it makes sense to refinance, but those fees tend to be nowhere near the fees assessed when refinancing a mortgage.
Auto refinancing enables many people to lower the interest rate on their auto loan and lower their monthly payments at very little out of pocket cost.
Where to Refinance an Auto Loan
In order to obtain the best possible deal when auto refinancing, make sure you compare auto loans from a number of different sources. Here are a few places where you can quickly and easily obtain multiple auto refinance quotes:
You might also see what kind of rate you are offered at a peer to peer lending site, such as Prosper.
Why More People Don’t Refinance
You might be wondering why auto refinancing isn’t more common given the potential upside.
Personally, I think more people don’t look into auto refinancing because they either don’t know it is an option available to them or they assume it involves the same high costs and hassle as refinancing a mortgage.
When Auto Refinancing is Most Appropriate
You may be a prime candidate for an auto refinance if any of the following apply to you:
- You have made your auto loan payments on time for at least a year
- You have increased your job stability
- You have improved your credit score since taking out your auto loan
- You currently have a simple interest loan that charges no prepayment penalties (although prepayment penalties may not be a deal breaker as they can be fairly low)
- You didn’t shop around on your original auto loan or took out a loan through a dealership. Dealer loans tend to be quite expensive.
- Market interest rates have dropped since you took out your original auto loan.
When Auto Refinancing May not be Appropriate
Auto refinancing may not be an option for you if your credit score has gotten worse, the vehicle has been damaged, or market interest rates have gone up since you took out your original loan.
Additionally, lenders are generally hesitant to agree to an auto refinance if the current loan balance is higher than what the car is actually worth.
Auto Refinance Tips
- Take into consideration any prepayment penalties that may apply when paying off your auto loan early. This normally isn’t a huge fee (i.e. $25 – $200) but you should know about it.
- Before refinancing, check with your current lender and see if they can lower your current rate without having to refinance. This may be a better option that than refinancing.
- Improve your credit so you can get a better deal on your auto refinance. Before refinancing, pull your credit report and check your FICO scores (credit scores used by most lenders).
- Try not to refinance a loan into a longer term loan. This may decrease your monthly payments but it will increase your overall out of pocket costs.
Auto refinancing may not be an option or appropriate for everyone given their unique circumstances. However, many people have quickly and easily saved themselves thousands of dollars through auto refinancing, so it is important to know that the option is out there should it be appropriate for you.
What are your thoughts about auto refinancing? Have you ever considered an auto refinance? Leave a comment below!