A large car payment reduces your monthly disposable income and, in the event you face financial difficulties, can make paying other bills more difficult. Fortunately, you aren't stuck with your car payment until the end of the loan term: You can refinance at any time to reduce the burden of a high payment.
When to Refinance
If interest rates are considerably lower than they were when you took out your original loan, now may be a better time than ever to refinance. A lower interest rate means lower monthly payments, and with the right loan, you can end up paying less for the car over the life of the loan. Your credit scores have a considerable impact on the interest rate lenders are willing to offer you. If your credit scores have improved – even by as little as 50 points – it may be time to start shopping around for a new auto loan with a better interest rate.
Although you won't pay the same steep fees for refinancing your auto loan as you would when refinancing a mortgage, getting a new car loan isn't always cheap. Expect to pay loan fees and a title fee for transferring the title from your existing lender to your new one. The costs associated with refinancing the loan reduce your savings. So shop around for the best interest rate and also request a breakdown of costs and fees from each lender. Before signing on the dotted line, compare the fees involved to your savings to determine which lender offers the best deal.
Although there is no time limit for when you can or cannot refinance your car, you could run into problems if you owe more on your car than the vehicle is worth. In this situation, lenders would consider you “upside down” on the loan. A lender won't refinance an upside-down vehicle because, in the event you default on payments and the lender must repossess the car, it could not sell the vehicle for enough money to recover the outstanding loan balance. You can increase your chances of a loan approval by dipping into your savings to pay down your loan balance before you refinance the remainder of the loan.
You'll run into a problem trying to refinance your vehicle if your loan carries a prepayment penalty. Because your lender makes its profit from the interest you pay, some lenders may penalize you for paying the loan off early and reducing the lender's profit margin. Prepayment penalties vary, but a steep fee for refinancing your existing loan may reduce your savings to such a degree that refinancing the car costs you more than simply remaining with your current lender. Review your loan documents to determine whether or not your current loan carries such a penalty. Sometimes prepayment penalties expire after a certain amount of time. Should that be the case, you need only wait for the penalty to expire before refinancing your auto loan.
Ciele Edwards holds a Bachelor of Arts in English and has been a consumer advocate and credit specialist for more than 10 years. She currently works in the real-estate industry as a consumer credit and debt specialist. Edwards has experience working with collections, liens, judgments, bankruptcies, loans and credit law.