There are several reasons to refinance your car loan. The most common or most popular is lower monthly payments. Another great reason is to lower the interest rate you are paying. By refinancing your car loan, you can usually obtain both a lower interest rate and lower car payment. You can also choose to lower your rate and keep the payment the same. By doing this you will pay off your loan sooner and more of what you pay will go toward paying your car off rather than paying interest. The rate decreases that you can realize depend on your credit and vary between customers. As an example, your $20,000 auto loan over 72 months dropping from 7.99% to 3.99% can result in nearly $40 saved monthly and more than $2,700 saved over the life of the loan.
Another reason to refinance your car loan is for people who are getting divorced; this allows you to get your name off any auto loan that was taken out by your spouse. This is important because if your former spouse fails to make payments, it will reflect on your credit score unless you remove your name from the loan.
When you were younger, you may have needed to purchase your car under your parents names or other cosigner to obtain a loan or a lower interest rate. This is most common for first-time buyers that have no credit. Assuming you have paid the loan on time, you should have credit established after about a year. Refinancing is the opportunity to put the loan in your name alone. This also frees up your cosigner’s credit so they can take out other loans if they need to.
Another reason to refinance your car loan is if you took out your original loan with a car dealership. Dealerships often markup rates when they arrange financing for their customers. A 1% to 2% markup could mean hundreds, even thousands, of dollars depending on the loan term and how much money you borrowed. Refinancing with a lower rate can save you $30, $50 or even more each month. That’s money that you can put back in your pocket, making the choice to refinance car loan a smart decision.