The biggest trick a car loan tells you is that you don’t need all of the money upfront, so you’ll find a way to afford it later.
Unfortunately, not only is that reasoning common among car buyers but it is misguided. After all, if you don’t have the money now to make monthly payments, what makes you believe things will be different months from now if you still bring in the same amount of dough?
But you’ve already signed the lease and it’s no time to be Captain Hindsight…
How do you lower monthly car payments? The solution is to refinance your auto loan. The process of refinancing an auto loan is fairly straightforward: you open a new loan with a different lender in order to pay off the balance on the existing loan. Refinancing a car loan is done for three different reasons:
- Lower the monthly payment. Having trouble making your monthly payment? The worst thing you could do is be late on payments (and pay even more fees in the process), or avoid making payments altogether and risk default. The primary reason individuals refinance is to reduce the monthly payment they make to the lender.
- Reduce the interest rate. Car loans, especially ones that are opened on used vehicles may feature high interest rates. Nothing is more frustrating than making your monthly payments on time yet never getting ahead of the loan because of high interest. The opportunity to reduce the interest rate on a car loan with another lender will depend on some pre-qualifications such as the current market rates as well as your credit score.
- Adjusting the duration of the loan. A shorter duration will save on interest yet may raise the monthly payment. It only makes sense if you can afford to pay more per month. The more common refinancing option is to extend the duration of the loan in order to reduce the monthly payment. Of course, this puts you at risk of paying more for the car over the duration of loan since more interest will collect on the debt.
Watch for Hidden Fees
A good lender is upfront regarding any transaction fees or annual fees associated with a new loan. These fees require you to pay upfront or are rolled into the loan amount as interest if you are unable to pay them off immediately. Consequently, it never hurts to have a little extra in savings before you refinance, or replacing one loan with another may not make too much of a difference after the hidden fees are calculated into the refinance.
Shop Around & Consider Applying to Multiple Lenders
Since auto loan refinancing is popular these days, there are multiple lenders that are willing to work with you. However, it doesn’t mean they all have your best interests in mind. Do your best to ask a lot of questions about hidden fees, APR, loan duration and other agreements regarding the new loan.
The good news is most lenders allow you to apply for free if you are willing to submit some personal information. It is important that you make sure the credit check will not hurt your credit score.
Applying for a new car loan is generally free from most lenders and there is no time limit or other obligations. It means that even if you just purchased the vehicle you are already eligible for refinancing because there is no specified amount of time you must wait.
Is it time to refinance to lower monthly car payments?
You do not have to wait for a specified amount of time after buying a new or used car before refinancing. So if your credit score was low when you opened the first loan yet has improved in a few months, you should at least apply for a new loan to see if you can save money on a monthly payment and/or reduce the APR.