4 Reasons to Refinance Your Vehicle

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If you're paying more than 6-percent interest on your auto loan, it's time to check out refinancing. Refinancing can save hundreds of dollars each year, and sometimes thousands over the life of the loan. For example, if you took out a $25,000 auto loan a year ago for five years at 7.75-percent interest, refinancing the balance today at:

• 4.75 percent for the remaining four years of the loan would save $1,373 -- $28.60 per month
• 5.75 percent for the remaining four years of the loan would save $906 -- $18.88 per month
• 6.75 percent for the remaining four years of the loan would save $448 -- $9.33 per month

Unlike refinancing a mortgage, refinancing vehicles is usually fast, easy and painless. Appraisals aren't required and fees are minimal. In fact, the younger your current loan, the more money refinancing will usually save. But refinancing is not a good idea for everyone. Look over the following five factors and decide if you qualify.

1. Lower Interest Rates
If interest rates have dropped two or more points since you last financed your vehicle, it's definitely time to take advantage of dropping rates. Banks and loaning agencies classify refinances as used-car loans and usually offer higher rates than those you were offered when the car was new, but even a single percentage-point reduction can make a big difference over the life of your loan. Cars.com posts updated auto interest rates, as well as a link to interest rates in your area.

2. Improved Credit Score
If your credit score was poor when you bought the car but you've cleaned it up since, you may qualify for a lower interest rate. It's likely you paid 18 percent or more the first time around, but several months of on-time payments could convince a lender to refinance at a much lower rate. Receive a free credit at www.AnnualCreditReport.com (the ONLY authorized source to get your free annual credit report under federal law).

3. Bad Original Financing
Even if you had a clean credit report, you may not have received the best rate when you bought your vehicle. Dealer-sourced loans usually carry a higher interest rate because they're hoping you don't know any better. Additionally, if you've experienced a financial setback and would like to lower your payments, increasing the term of the loan will lower your monthly payment.

  
4. Worth of the Vehicle
If the Kelly Blue Book value of your car is less than your loan balance, you'll likely find it difficult to find a lender willing to provide a loan at a lower interest rate. These are called "upside-down" loans and are very unpopular right now. Even if you find yourself in such a situation, however, a lender may be willing to extend the term of the loan and/or reduce the interest rate, thus lowering your monthly payments.