COVID + Credit: Refinancing a Car Loan During the Pandemic
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The Coronavirus/Covid-19 pandemic has resulted in immense financial strain across the country and left many industries looking for ways to provide relief to consumers while still encouraging necessary sales. For those Americans who remain relatively financially stable, now may be a good time to refinance an existing car loan to secure a new, more manageable interest rate.
The refinancing process involves getting a new secured loan with a lower interest rate to pay off your existing car loan. Refinancing could potentially save you money and result in a better deal than the one you got on your original loan. Many lenders are offering consumers great refinancing options with extremely low — even zero percent — interest rates in an effort to attract business.
Before you rush off to refinance, though, be sure to consider the following key factors to ensure that it’s the right decision for you. And remember: If you have recently become unemployed or experienced a similar reduction in income, you may have a challenging time refinancing your car loan. Because refinancing often involves an up-front cost to save you money in the long run, it’s generally better to consider refinancing your loan only if you are otherwise financially stable.
Refinancing a car loan during the pandemic
Consider these five factors before moving forward with a refinance:
1. The interest rate on your loan. If the interest rate on your current car loan is higher than you’d like, look around at different banks and credit unions to see what comparable lenders are charging. Getting a better interest rate is the main reason people refinance, as it means lower and more manageable monthly payments.
Even if you can only reduce your car payment by just a bit, that small amount might be worth the effort and up-front expense. For example, lowering your car payment by just $25 per month when you have three years left on your loan can result in $900 of overall savings.
2. The state of your credit scores. Your ability to secure a lower interest rate through refinancing depends on your credit history and credit scores. Therefore, you are in a good position to refinance if your credit has improved since you got your current auto loan. Refinancing can also help improve your credit scores if you’re struggling to make your car payments on time and in full.
If your credit has not improved since getting your original auto loan, you probably will not benefit from refinancing as it’s unlikely that you’ll qualify for a better interest rate.
3. The term of your loan. If the term on your original loan is in the range of five to eight years, refinancing and securing a new loan with a shorter term could save you money by reducing the total amount you will pay in interest over the life of the loan. Don’t refinance if doing so would extend the term of your existing auto loan because you will likely end up paying more over time, even with a lower monthly payment.
Additionally, it’s important to remember that a shorter loan term will mean that you increase the amount you pay each month, so make sure this additional expense is something you’re prepared to cover in your monthly budget.
4. The value of your car. When evaluating whether or not refinancing is right for you, it’s also crucial to consider how much your car is worth.
If you owe more than the car is worth (also known as being upside down on the loan), you might not be able to refinance. A refinancing agent would have no incentive to work out a new loan because if you were to default, they’d be stuck with a car worth less than the money they lent.
5. How long you’ve had your current loan. If you have not had your current auto loan for very long, your credit has probably not changed enough to make refinancing worthwhile. If it’s too early or not feasible to refinance, work instead to pay off your current loan faster by doubling up on your payments so you can get out of the loan sooner.
Getting the best car loan rate
If you decide to refinance after considering the important factors outlined above, there are steps you can take to increase your chances of getting the best rate possible. Research your options online and aim to get a minimum of three quotes to compare interest rates.
Try your current bank first, and be sure to check out a few online banks, which at times offer better interest rates. In the end, getting a great deal comes down to having good credit, in addition to taking the time to educate yourself and think through the decision.