Factors to Consider Before Refinancing Auto Loans

When interest rates fall, homeowners look to mortgage refinancing as a way to free up cash, fund home improvements and build equity more quickly. Those strategies can have a significant impact on property owners, helping their reach their financial goals faster and aiding them in many other ways. That is fine for homeowners, but what if your most significant asset is the one you drive? Whether you own your own home or not, you may be wondering if refinancing your auto loan makes sense in an environment of falling interest rates.

Factors to Consider Before Refinancing Auto Loans

Like most things financial, there is no one right answer to whether or not an automotive refinancing will be worth the effort. If you want to drive a hard bargain and put more cash in your wallet, you will need to ask yourself a number of questions first, including the following.

How Much Time is Left on Your Loan?

This is perhaps the most significant factor in determining the value of an auto loan refinance, and it is the first thing you should look at. If you are in the last six months, or even the final year, of your auto loan, the hassles of refinancing are unlikely to be worth it.

Many auto loans are front end loaded, meaning that the majority of the interest is paid in the first few years. If you have already paid back the majority of the money, the amount you could save with a refinance will probably be insignificant or nearly nonexistent.

Has Your Credit Score Improved?

Lenders will look at a number of factors when evaluating your refinance request, starting with the health of your credit score. If your credit score has improved since you first bought your car, you may be able to get a double benefit from the refinancing plan, and a doubly low interest rate.

On the other hand, if your credit score has declined since you took out the loan, the interest rate you can get on your auto loan refinance will probably not be much lower than the one you currently have, and it could even be higher. If you are thing about refinancing your auto loan, you need to check your credit score first.

Has There Been an Increase (or Decrease) in Your Earnings?

Another factor lenders will use to approve (or decline) your request for an auto loan refinancing deal is the relationship between your income and the amount of the loan. This is the so-called debt to income ratio, and it will play a big role in everything from the interest rate you can get on your refinancing to whether you qualify at all.

Before you apply for an auto loan refinance, you should first look at how much you are currently earning compared to what you were making when you first bought the vehicle. Hopefully your earnings have increased since you first got your wheels, and if so an auto loan refinancing could save you money, especially if your credit score has also risen.

How Much Have Interest Rates Fallen?

The magnitude of the interest rate reduction will matter a great deal when considering an auto loan refinance, so you will want to do your homework. For homeowners, a reduction of at least one or two percentage points can make the difference between a mortgage refinancing that makes financial sense and one that is not worth the effort, and a similar rule exists for other types of debt refinancing.

Hopefully you know how much you are paying on your current auto loan; if not now is the time to find out. Once you know how much interest you are currently paying, you can compare current rates to determine whether or not an auto loan refinance makes sense.

How Much is Your Car Worth?

The third and final factor lenders look at when approving auto loan refinancing is the value of the car. If the value of the vehicle you are driving has fallen sharply since you first took out the loan, you are likely to have trouble convincing a lender to refinance the note, but if the vehicle has held is value, finding a refinancing offer should be no big deal, especially if your credit score is stellar and your earnings have held steady or increased.

You can get a snapshot of that value at a number of popular websites, giving you a glimpse into where you stand and whether or not refinancing the auto loan will be worth the trouble. When you formally apply for a new loan, the lender will do further research and conduct a more thorough appraisal of your vehicle and its value.

Refinancing your debt when interest rates fall can make a lot of sense, and that does not just mean getting a new mortgage. If you are tired of your high auto loan payment, you may be able to reduce it with some strategic refinancing, but only after you have answered the questions posed above.