You've had a car loan in place the past few years, but you're wondering if sticking with your loan until the end of the term is the right thing for you financially. An auto refinance buys out your current car loan and puts you in a new loan, generally with a different interest rate and terms. Some situations make it beneficial to consider going through the refinancing process, such as reducing your monthly rate, staving off financial disaster or taking an ex-spouse's name off of a shared loan.
Reduce Monthly Rate
One of the common motivations for borrowers considering an auto refinance is reducing their monthly rate. If you run into financial difficulties and you're concerned with missing payments or not being able to make your car payment at all, going through the refinance route before you end up affecting your credit with missed payments gives you a way to stabilize your financial situation. Your existing car loan company may offer specialty programs for monthly rate reductions if you are in danger of missing payments, as opposed to you refinancing with a different loan company.
What happens when you get divorced or break up with a partner, but you still share financial responsibility through a car loan? One way to get their name off of a car loan they co-signed on is through an auto refinance. According to Credit.com, an auto refinance establishes a new loan that does not include your spouse's name. Depending on the original loan documents and whether the car title is in both of your names, you may need your ex-partner to approve the refinance. Permission may have been granted through the divorce proceedings or a decree by the court, so you may not need to ask them directly, depending on the arrangements. Check with your divorce paperwork and attorney before you attempt to refinance the car, so you stay within the bounds of your divorce decree.
One auto refinance benefit that you may not realize is that you end up getting a one-month gap in between payments, as well as the ability to establish a new due date when you sign the paperwork for the new loan. While you don't want to redo your entire loan only for these two benefits, it's a nice side benefit if you planned on refinancing your auto loan anyway.
Interest Rate Reduction
The economic downturn is bad for jobs, the housing market and many other areas of your financial life, but what it's great for is lowering the interest rate for loans, such as auto loans. If you picked up your loan during better economic times, it's time to watch the interest rates in order to get a great rate for your refinancing. For example, in July 2013, the interest rate dropped for 36-, 48- and 60-month loans to 5 percent, according to Credit Karma. The next month, it popped up to 8.5 percent. Keep an eye on the market trends, and jump on a refinance at the lowest interest rate you can manage to grab. Additionally, if your credit wasn't so great when you first picked up an auto loan, talk to a lender about the rates you have access to now, as opposed to the rates that you were given when you first established the loan. Check your credit rating yourself before you go in to ensure that you do have better credit than you originally did when you signed up for the auto loan. If you have two years between your last bad credit mark and the time you are thinking about refinancing, you may be in a better position.
Reducing Loan Term
Want to minimize the amount of interest you're paying? One way loan companies make money is by profiting from the interest they charge on a loan. The shorter the loan term, the lower the amount of interest you pay overall. If you are in a 60-month loan and you switch over to a 30-month loan, you end up paying less interest overall. Whatever you do when you refinance, don't go into a longer loan term than what you originally had, unless you need to lower your monthly rate.