An auto refinance is when a person replaces their existing car loan with a new one. They may refinance through their existing lender or find a new one that will make them a better offer. There are several benefits to this strategy, which we’ll discuss further below.
When to refinance a car loan
Depending on what your situation is, an auto refinance may make sense. Below are some of the factors that can help you decide.
Credit score has improved
A higher credit score can lead to a lower interest rate and more attractive terms. If a person’s credit score has increased since they initially took out their car loan, they might qualify for a better rate through refinancing.
Interest rates have decreased
Factors such as the strength of the current economic environment can cause interest rates for auto loans to fluctuate. If someone purchased their car a while ago, auto rates might have gone down. A lower rate can save them a great deal of money on the overall life of their loan. The U.S. is currently in a rising-rate environment, so be mindful.
Lower monthly payments
There are a few reasons a person might want to reduce their car payments. Maybe they’d like to boost their monthly cash flow. Or perhaps their employment situation has changed and they can’t afford the current payments anymore. An auto refinance can allow them to extend their term and, in turn, lower their monthly payments. They may, however, pay more in interest in the long run.
Tap into the car’s equity
A person may be able to use their car’s equity, which is the value of their vehicle minus the amount they owe on it, to take out a cash-out refinance loan. For example, if their car is worth $20,000 and they owe $5,000 on it, they may be able to get a refinance loan for $15,000 and use the additional $10,000 in cash for major expenses or paying off other debts. This can come in handy if they have a financial emergency to cover.
How often can I refinance my car loan
While there is no legal limit on how many times you can refinance a car, each lender has its own rules. And if you refinance too often, a lender will be less likely to offer you a loan with competitive terms. Multiple refinances can also cause origination and title transfer fees to add up. In general, do not plan on refinancing your car loan more than once.
Refinancing can be a smart financial move
While an auto refinance isn’t right for everyone, it may work for you. Whether someone’s goal is to save money on interest, lower their monthly payments, tap into their equity, or pay off their car as soon as possible, this strategy should be on their radar. If they decide to refinance, it’s important to compare lenders, rates, and terms so they can find the right offer for their unique situation.
About OneMain Financial
OneMain Financial is the leader in offering nonprime customers responsible access to credit and is dedicated to improving the financial well-being of hardworking Americans.