Borrowing a car can seem like a daunting task, but there are definitely scenarios where car loans can help you move forward. For example, new vehicles are often accompanied by 0% APR financing offers and people with high credit often pay low interest rates equal to mortgage rates. Not only that, but borrowing for a car can be the only way to arrange transportation to and from work.
What is the problem? In general, Americans are accustomed to using car loans to finance more than they can reasonably afford. We know this because not only is the average car loan amount increasing every year, but it is also constantly increasing longer.
A 2021 report by Experian – the Third quarter Statement of the car financial market – just highlighted all the horrible facts. Here are some of the most disturbing statistics:
- As of the third quarter of 2021, the average new car loan amount was $ 37,280, up from $ 34,682 in the third quarter of 2020.
- In the same quarter, the average payment for a new car rose to $ 606, from $ 565 in the third quarter of 2020.
- During the same quarter, the average term of a new car loan was 69.47 months. This is actually shorter than 2020, when the average loan duration was 69.64 months. But it is still almost 6 years!
To sum it all up, we borrow more than ever and distribute the payments as much as we can. Remember that average The new car loan lasted more than 69 months in the third quarter of 2021, but that is the average. There are also many 84 month car loans that leave people with an overwhelming car payment for seven whole years.
With all of this in mind, you may be wondering if now is the time to change the way we handle car loans or refinance your car loan to get a better deal. There are many scenarios where refinancing makes sense, but there are still times when it is best to stay with the car loan you have.
When to refinance your car loan
There are four main reasons why you should consider refinancing your car loan and more than one person can apply at a time.
Your credit score has improved dramatically since you bought the car
If you had bad credit when you first bought your car, refinancing right now could help you save interest or pay off your car faster. This is because, for the most part, the interest rate you can qualify for is closely linked to your credit score.
According Stock exchange, people with scores in the range of 300 to 500 paid an average of SEPE 12.99% for their car loans in the last measurement, while those with scores from 501 to 600 were charged an average of 9.92% in April. On the other hand, people with fair to excellent credit or scores from 601 to 850, pay APR ranging from 6.32% to 2.58%.
If your credit was poor when you bought your car, but your score is well above 600 now, refinancing your car loan could be a cost-effective move.
Interest rates have been reduced since you first funded the vehicle
Maybe your credit score is about the same as it was several years ago. In this case, it is still possible to take advantage of the lower car loan rates available today.
For example, the Experian study showed that the average annual car loan for new cars stood at 5.38% in 2019, then fell to 4.23% in 2020 and 4.05% in 2021. If you check interest rates today and is lower than it was when you got your car loan several years ago, refinancing could make sense.
You want to pay for your car faster
If you want to repay your car loan faster, refinancing into a new loan with a shorter repayment schedule could get you on the right track. This is especially true if your current car loan is one of the longest for up to 84 months.
Of course you do not should refinance your car loan to pay off your car faster. As long as your current loan does not impose prepayment penalties, which you should not, you can pay more than the minimum loan payment on your car and achieve the same thing.
You need a more affordable monthly payment
You may need a more affordable monthly payment than you currently have. In this case, refinancing into a new car loan with a longer repayment schedule, lower interest rate or both could help you achieve this goal.
Just keep in mind that extending your repayment schedule leaves you with a lot more debt. As a result, you could also pay much more interest.
Refinancing your car loan: What to look out for
While any of the above reasons could make refinancing your car loan a good deal, there are some serious pitfalls to watch out for. For example, you should look out for refinancing-related commissions, including prepayment penalties for your existing car loan, and commissions related to the new car loan you are considering.
While most car loans do not have prepayment fees, you will still want to read your loan agreement to check. In the meantime, you’ll also want to compare new car loans to look for options that do not charge origin or application fees.
Also keep in mind that refinancing your car loan for an extended period can be accompanied by advantages and disadvantages. You may be able to secure a lower monthly payment, for example, but you can repay the car loan much longer than you would like.
You should also consider whether refinancing your car loan is worth the time and effort. If you do not owe much and can afford to pay more than the minimum, you can get rid of your car loan faster by making larger monthly payments.
The bottom line
Does Refinancing Your Car Loan Make Sense? To most people, the answer to this question is a resounding “maybe.” At the end of the day, it really depends on what you earn with refinancing.
For example, could refinancing help you save time, money, or both? Maybe you could get a lower monthly payment that best fits your current income and bills. Consider playing with a loan payment computer to find out for sure.