Every car refinance deal is different. Therefore, when you should refinance your car loan depends on when it makes the most sense for you. Still, most people refinance their car loans when 1) their credit has improved, 2) they need to lower their monthly payments, 3) national interest rates have changed, or 4) they want to remove (or add) someone as a cosigner on their loan.
Let’s look at each scenario.
One of the most common reasons to refinance is to lower your monthly payments. A car refinance can be a good way to reduce monthly expenses, but you need to make sure that refinancing makes sense for you for this reason.
Because of the way car loan interest rates work, you have two options for lowering your monthly payments on a new loan. You can get a lower interest rate, extend the loan term, or do both.
So if you refinance at a lower interest rate and the loan term stays the same, you would lower your monthly payments.
Or if you simply extend your loan term and keep your old interest rate, you will also lower your monthly payments. In general, however, the longer the term of your car loan, the more interest you will pay overall over the life of your loan.
The reason longer terms may cost you more over the life of your loan is because you’ll pay an interest fee each month on the loan balance you haven’t paid off. The longer it takes to pay off your car loan, the more interest you will pay on the remaining balance you still owe. However, it is possible to extend the term of your loan, lower your monthly payment and pay less for your car overall. If you lower your interest rate enough, a longer loan term may not result in you paying more for your car.
It can be difficult to find the balance between the amount you pay per month and the amount you pay overall over the life of a loan. It’s important that you understand how interest rates and loan terms affect the cost of your car loan so you can make an informed decision about your refinancing goals.
When interest rates decline across the economy, you have a better chance of refinancing at a lower rate as lenders generally lower their interest rates to compete.
However, it is not easy to accurately predict future interest rates. The Federal Reserve plays a role in setting interest rates, but various economic forces also play a role, making forecasting interest rates extremely difficult. The only certainty is that interest rates will fluctuate. So it may or may not be worth waiting for interest rates to fall.
Additionally, the fact that falling interest rates can help borrowers doesn’t mean that rising interest rates should deter you from refinancing. If your credit score has improved since financing your car, refinancing can help reduce your monthly payments and interest expense, regardless of prevailing interest rates.
Not everyone seeks to refinance solely for financial reasons. Sometimes there are more personal reasons that motivate people to refinance, such as the end of a relationship.
If you have a co-borrower on your current loan that you would like to remove for any reason, refinancing may be a solution. When you refinance, you’re essentially replacing your old loan with a new one, which typically allows you to remove a co-borrower from your car loan (and/or add someone).
