You recently bought a car, but in the brief time since, you’ve noticed interest rates dropping well below the rate you got on your vehicle. You want to refinance your car loan, but you aren’t sure if it’s too soon to do so.
There are no particular guidelines on when you can refinance a vehicle. You could theoretically do so just a few months after you originally financed. But before refinancing, you should consider several factors. While you may garner a lower interest rate, your existing contract, your credit score, and other factors will impact how much money you’ll actually save when refinancing. Here’s an in-depth look at what you should take into consideration beforehand.
When Does It Make Sense to Refinance a Car Loan?
There are a number of situations in which it may make sense to refinance your auto loan, even if you recently purchased the vehicle. A lower interest rate may be a contributing factor, but so is your credit score and the state of the economy. You may want to consider refinancing in these situations.
- If you bought your car at a time when interest rates were high and they’ve since dropped, it may make sense to refinance. Interest rates tend to rise and fall with market developments and the levels set by the Federal Reserve. Rates drop when lenders want to encourage people to spend. Rates also depend on inflation to some degree, as well as the state of the economy.
- If your credit score has increased significantly since you financed your car, you may want to consider refinancing. If your lender employs risk-based lending, which offers different rates depending on your risk of defaulting on the loan, then you may benefit from refinancing when your credit score has improved. PSECU does not employ risk-based lending, so all members receive the same low rates.
- If you want to have a co-signer removed from your original auto loan or your joint loan needs changed to a single signer, you can look into refinancing.
Things to Consider Before Refinancing
Say you financed your car with a 6% interest rate, but you see a lender offering 5%. You should jump on that immediately, right? Not necessarily. There are more factors that play into financing than just the interest rate.
For instance, before refinancing, you’ll need to find out if your lender imposes a fee on those who pay off their loans before a certain date. Some contracts include this in the fine print. The lender uses this as an incentive for you to stick with them through the end of your initial contract. If your auto loan is through PSECU, there is no fee for paying off your loan early. It’s worth noting that we do require you to borrow $1,000 above the loan payoff amount when determining your loan amount.
You should also consider what your monthly payment is now and what it would be if you refinance. If you’re only saving a couple of dollars, it may not be worth it to refinance.
Remember that lenders take your payment history into consideration when reviewing a loan application. Paying the monthly installments on your current loan on time increases the odds of being approved to refinance. Payment history is a factor that impacts your credit score significantly, and an excellent credit score could get you a better rate. So, if you’ve missed payments on your current loan, you may be less likely to get approved for refinancing by a financial institution that uses risk-based lending.
Talk to PSECU About Refinancing Your Auto Loan
If you’ve taken these points into consideration and are looking to refinance your loan, consider joining PSECU. You can talk to us about refinancing an existing loan on your vehicle. See if you’re eligible for membership today to get started.
Want more tips on managing your finances? Check out our WalletWorks page.