This article is sponsored by PenFed Credit Union
You’ve probably heard of refinancing a mortgage, but did you know you can also refinance your auto loan? If loan rates have dropped since you purchased your vehicle, or if your credit score has changed, you may be able to refinance and save.
What you’ll need
First, contact your current lender and find out your loan’s payoff amount. Shop around to see who is offering better rates. Gather some recent loan statements and your W-2s or other proof of income and apply for financing with a new lender who offers a lower rate.
How you can save
Suppose last year you financed $25,000 at 8% interest for a five-year car loan. Your monthly principal and interest payment would be about $507. But say today you could refinance the balance (just over $20,000) for the remaining four years at a lower rate of 3%. Your payment would drop to $451. That’s a savings of $56 a month, or $2,688 over four years, with the same payoff date.
It’s also possible to reduce your monthly payments by refinancing for a longer term. If you’ve had a change in your income or unexpected expenses, refinancing your car loan can help you make ends meet.
Know the drawbacks
While refinancing has its advantages, there are also some potential pitfalls. If you refinance for a longer term, you’ll end up paying more for your vehicle over time. You new loan may come with title and registration fees, so be sure to factor those into your costs. There can also sometimes be costs to get out of your old loan. Check to see if your contract has any prepayment penalties or other restrictions. If these situations don’t apply, or aren’t enough to offset your potential savings, then refinancing could be right for you.
For more information, visit PenFed.org, or call 800-247-5626. Federally insured by NCUA.