6 questions to answer before you refinance your car
If you’ve been thinking about refinancing your car—to potentially lower your monthly payment or reduce the amount of interest you pay—you might be wondering what’s involved. Consider these six questions before you make your decision.
What are the refinancing requirements?
Each bank or lender has specific refinancing requirements. These might include the age of the car, how many miles are on it and how much you still owe on your loan, so be sure to ask about the details. For example, at Bank of America, you may be eligible to refinance if you have $5,000 or more remaining on your car loan ($7,500 if the loan was made in South Carolina or Minnesota) and the car is less than 10 years old with fewer than 125,000 miles on it. The Bank of America auto loan refinance calculator can help you determine if refinancing makes sense for you.
Would you owe prepayment penalties?
Does your current lender subject you to a prepayment penalty for paying off your loan early? Some car loans don’t have these penalties. If you would be subject to one, do the math: If the amount you save by refinancing significantly exceeds the penalty, refinancing could still be a good idea.
What interest rate could you get?
Is the interest rate you qualify for significantly lower than your current loan’s rate? If so, it may be a good time to refinance. But if it’s the same or higher, it’s probably not the right time.
How’s your credit score?
If your credit score has improved since you got your car loan, you may qualify for a lower interest rate. Learn how you can improve your credit score before you refinance.
Has your income changed?
Refinancing your auto loan so you have a lower monthly car payment can make sense if your income fluctuates. The lower payment can help ease the strain on your finances. Consider creating a budget, if you don’t already have one, so you can better manage all your bills.
How long until you pay off your loan?
Refinancing and extending your loan term can lower your payments and keep more money in your pocket each month—but you may pay more in interest in the long run. On the other hand, refinancing to a lower interest rate at the same or shorter term as you have now helps you pay less overall.
After gathering the information and considering all of your options, see if it makes sense to refinance your car loan. Contact potential lenders to learn about their rates and terms.