Did you know you can refinance your auto loan? No? You are not alone
If you didn't get a great rate on your auto loan, it may be time to reassess.
Many buyers head to the dealership not well prepared. Half go into the purchase without knowing their credit score, according to a new report from used-car marketplace Instamotor. Even those who do often fail to shop around for financing.
"People may know their [credit score] number, but they may not know if it's good or bad, or how it relates to the marketplace," said Philip Reed, an automotive expert for NerdWallet.com.
The net effect is that you could end up with a rate that's higher than you might have otherwise gotten, with a little more preparation and negotiation, he said.
That's an expensive misstep, as consumers borrow more to finance car purchases, and take on longer-term auto loans. Rates can vary widely by source (see chart above), according to a February WalletHub.com report.
One potential fix, refinancing your auto loan, often flies under the radar. In Instamotor's analysis, just 9.2 percent of borrowers have used that tactic. Unlike refinancing a home loan, you could shop for a secure replacement auto loan in under an hour, Reed said.
"Home refinancing is a much more involved process than auto refinancing," he said.
In particular, it makes sense to re-shop your loan if your credit score has improved since you took it out, enabling you to qualify for a better rate, said Matt DeLorenzo, managing editor for Kelley Blue Book. Buyers with fair credit end up spending six times more to finance a vehicle than those with excellent credit, WalletHub.com found, adding $6,403 in interest over the life of a $20,000, five-year loan.
It also makes sense to assess your options if market rates have dropped since you took out the loan, or if you have other reasons to believe you didn't score the best rate at that time. Drivers often look at refinancing if they are struggling to make payments, Reed said.
But refinancing isn't always an option. The car serves as collateral on the loan, so you may not be able to secure new financing if you currently owe more than the car is worth, DeLorenzo said. That might be the case on an older used car, for example, or if the original loan has a long term.
Lenders may also limit financing to borrowers with a history of on-time payments and to cars in good condition, with fewer than a set number of miles.
If you do opt to refinance, aim to keep your current term rather than extending repayment, Reed said. That cuts the amount of interest you'll pay overall and help you avoid the risk of finding yourself upside down on the loan.
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