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Publish Date - February 24, 2022

Author: Staci Bailey

Categories:   Auto Loans & Financing    Refinance To Save   

How Auto Loan Refinancing Can Do Wonders for Your Finances

It costs money to borrow money. The fee that financial institutions charge for issuing loans is called the annual percentage rate, or APR. On a car loan this amount can add up to hundreds or even thousands of dollars.

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It costs money to borrow money. The fee that financial institutions charge for issuing loans is called the annual percentage rate, or APR. On a car loan this amount can add up to hundreds or even thousands of dollars.

The APR is represented by a percentage and it is calculated annually on the principal amount. This money is added to the amount being borrowed and needs to be repaid. Auto loan refinancing can lower the APR on a loan and do wonders for your finances.

If you are paying too much for your current car loan then refinancing can help you save. Auto loan refinancing allows you to secure a new loan to pay off a previous one. If you can get a lower APR then you can end up paying much less over the life of the loan.

There are several factors which affect the APR that is charged on a loan. Refinancing at the right time and with the right focus can get you a better deal and do wonders for your finances. There are several ways that you can save with auto loan refinancing.

Take Advantage Of Lower Interest Rates

A good part of the APR is based on the federal funds rate. This is the rate that commercial banks charge each other for overnight lending of reserve balances. The federal funds rate drives the prime rate which banks use to determine how much interest to charge on most loans.

The federal funds rate is set by the Federal Reserve and it fluctuates. When the economy is strong the Federal Reserve can raise the federal funds rate to encourage saving. During times of economic recession the federal funds rate goes down to favor spending which fuels the economy.

Depending on when you secured your auto loan the rate your APR was based on may be higher or lower now. The most used prime rate is the one that is published by the Wall Street Journal. How does your current rate compare? Even a small change could translate to big savings on your auto loan.

Enjoy Your Improved Credit Score

There is a component of the APR which is based on the risk that a borrower represents. The fees banks charge for lending need to cover the costs of loans that fall in arrears or are never repaid. How much risk an individual borrower poses is represented by their credit score.

Individuals with high credit scores get the lowest interest rates which are closest to the prime rate. Your credit score is based on your payment history and financial details. If you have been making the payments on your car loan on time, your credit score may have gone up and that might make you eligible for a lower rate.

Leverage A Better Financial Situation

If your income has increased or your expenses have decreased you may find that you can afford to pay more on your loan each month. By paying more towards your loan you get it paid off faster. Shaving time off your loan means you will be paying less interest.

The loan term is the amount of time you have to pay back a loan. For auto loans a typical term runs between 36 and 72 months. Loans with longer terms mean smaller monthly payments but they get charged a higher interest rate than those with short terms.

If your financial situation allows it, auto loan refinancing for a shorter term loan can translate to substantial savings. Paying it off faster means less time to pay interest. Additionally, refinancing for a short term can make you eligible for a lower interest rate.

Get A Smaller Loan

The APR is calculated annually on the amount that you borrow. The size of the loan you are applying for is called the principal. Decreasing this amount will change how much interest you will pay over the course of the loan.

If you have managed to set aside some savings since you applied for your car loan it may be worth considering diverting those funds towards your debt. This will allow you to pay off your loan earlier and pay less interest overall. It’s usually a better financial decision to use savings for lowering debt than to have it sitting in a savings account.

Depending on what kind of car loan you have, you may be able to make additional payments without penalty. However, in some cases it’s better to refinance for a new loan and use the savings to borrow less. Refer to your loan agreement to see what kind of penalties you may incur and determine what makes the most financial sense for your situation.

Negotiate Lower Fees And Rates

Your APR includes interest and it also includes all the fees and costs that are involved in procuring the loan. Not every lender includes the same fees. If your APR seems over inflated then you may be paying more in fees than you need to.

People are often intimidated by the financing process but remember that you are the customer and it is still a service for which you pay. In most cases there are multiple lenders who would gladly take your business. Do your research and see what the various options available to you are offering. Let them compete for your business.

It is a common misconception that you can’t negotiate for a better APR but in many cases you can negotiate some of the fees and rates to get a better deal. Educating yourself and seeing what rates you’re eligible for can put you in a stronger bargaining position. If you didn’t try negotiating the first time, then auto loan refinancing may be your second chance.

There are many situations where auto loan refinancing makes good financial sense. The most effective way to see if a refinancing loan is the right choice for you is to learn what other lenders are willing to offer. Talk to your local bank and take your search online to compare auto loan quotes from multiple lenders from the comfort of home.