Refinancing is all the rage right now. Ads on the television are screaming about the lower interest rates being offered and how you can save money, but the ads are pretty vague as to how much money you will save, nor do they mention that refinancing is not wise for everyone. There are only a few circumstances under which refinancing a car loan makes any sense.
Improved Credit Score
If you went through a bad financial time and were forced to take advantage of an auto loan with bad credit, you most likely had to pay a high interest rate. Something in the neighborhood of 18 percent would not be uncommon for some alternative auto loans. If you credit score has improved, you could benefit from an auto refi. You still have to be careful. You will typically need an auto-enhanced credit score of at least 680 in order to be offered a significantly lower interest rate.
Significantly Lower Interest Rate
Some experts say that you should refinance your car even if the offered rate is one percent lower than your current rate. That may be true if you are locked into a long term loan, say four years or more, but on a short term loan it may not make much sense. Additionally, keep in mind that the ”offered” rate you see in advertisements is the rate offered to customers with the highest credit scores. Your rate may not be quite so enticing and you will only know after the bank pulls your credit score.
So, you should refinance your car only if you have significantly improved your credit score and/or the interest rate that you will be receiving is lower than your current rate. You do need to be aware that refinancing your car will lower your credit score for a short time because of the ”hard pull” of your credit report and your loan will have a high balance to credit line ratio.