Has your credit score increased since you got stuck in a high interest car loan? Now is a great time to save money by lowering your interest rate. To do so, here are some steps that we suggest:
You have two options:
Your first option is to ask your current car loan lender to lower your interest rate. This is not a refinance of your loan. Your current loan will not close and a new loan will not be opened. You are just asking your current auto lender to lower your interest rate due to your increased credit score and on time payments on your existing auto loan. In this instance, your payment will not change, but because your interest rate is lower, more of your payment will go towards paying off the principal balance (the amount you borrowed) on the loan and less towards interest. You will end up paying off the loan faster.
Your second option is to refinance your current auto loan with a new lender. This option does mean you are closing your old car loan, and getting a new one. Take these steps before you refinance your auto loan:
- Run the numbers: Before reaching out to auto lenders, use an auto loan calculator to make sure you are as informed as possible. Also, we suggest running the numbers on what your car is worth. If you are upside down on your loan, it will be more difficult to refinance. To know how much your car is worth go to Kelly Blue Book and run the numbers: https://www.kbb.com/whats-my-car-worth/
- Shop around. We suggest talking with a local credit union or community bank. Credit unions tend to have the lowest interest rates on car loans.
- Inform yourself about the new loan terms: If it works for your budget, try to get a new loan with not only a lower interest rate, but as short a term as possible that still works with your budget. For example, if your original car loan was for 5 years (a 60 month term to pay it off), and you have made payments for 30 months, try to get a new car loan that lasts only 2 or 3 years (24-36 month term). If you refinance with a lower interest rate but extend the overall time you are making car loan payments by taking out a new 5 year (60 month) loan, you may lower the monthly payment, but you may still pay as much, or more, for the car overall.
What else should you know:
- If you do end up refinancing your car loan, know that the process of closing your current auto loan and opening a new loan could decrease your credit score. But no worries, the savings on the interest rate will make it worth it. Just make sure to make on time payments on the new car loan and in 3-6 months your credit score should be right back to where it was.
- In order to refinance, you need to have the current car loan for at least 6 months but probably more like 12 months.
- Before applying for the refinance, make sure your credit score is the highest it can be. Make sure there are not any recent late payments (30+ days) on any credit accounts that report to the credit bureaus. If you have had a recent 30 day late pay, consider refinancing in 6 months and concentrate on making on time payments to your credit account during this time.
- Get your credit card balances as low as possible and wait until they report that updated balance on your credit report. Use Credit Karma or Experian’s free credit monitoring (there’s no need to buy Experian’s credit monitoring program – the free version is the best!) to know when the credit cards have updated and then talk with an auto lender. Ideally your credit card balances would be under 30% of the credit limits, but under 10% is even better for your score! Remember: any decrease in credit card balances helps!
Need help? Contact one of Working Credit’s Credit Building Counselors at program@workingcredit.org!
