Monthly car payments, or any regular payment schedule for a vehicle, can be a significant line item in a household budget. By refinancing, or replacing the terms of your existing loan with new terms (including a new interest rate and repayment schedule), you may be able to reduce the amount of your monthly payment.
Before driving off to sign a new loan, however, ask these three questions:
A loan’s interest rate can depend greatly on your credit score. The three-digit number (scaling from 300 to 850) rates a borrower’s creditworthiness by taking into account their history of repayment, total number and mix of credit accounts, amount owed on your respective accounts, recent credit inquiries and other factors.
When refinancing, if your credit score is higher than when you took out the initial loan, you are more likely to secure a lower interest rate. Conversely, a lower credit score may result in a higher interest rate than the loan already in place. If you are in the latter situation, it is beneficial to try to improve your credit score before refinancing by paying credit accounts on time, keeping overall debt low and limiting credit applications. Learn more about credit scores and credit reports here.
If you refinance to a longer term than what was remaining on the existing loan, you likely will decrease your monthly payment by spreading out the remaining principal. However, it is also possible that you will pay more in interest over time — particularly if interest rates have increased since taking out the original loan.
That does not necessarily mean refinancing is not the right thing to do. A reduced monthly payments can outweigh other considerations. Regardless, the multiple factors at play highlight that a borrower should understand the total impact of refinancing and evaluate it against current and long-term needs.
Be sure to closely read your original loan documents to determine if there are any prepayment penalties, should you choose to refinance. Any penalties/costs should be included in your refinancing evaluation.
Even if there are no lender fees associated with refinancing, there may be additional costs related to paperwork that must be filed with a department of motor vehicles. Costs and rules vary by state, so contact your local DMV or visit its website to check for any fees.
The potential savings from refinancing a vehicle make it an attractive option for borrowers. Be aware of the decision’s short-term and long-term impacts, including the total amount of money you may end up paying over the course of the loan, and consider meeting with a professional banker to weigh your options.
Learn more about FNB’s vehicle financing solutions here.
