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How Much Auto Loan Can I Afford?

Ideally, your car payment should never be more than 20% of your net monthly income. This means if your take home pay, after taxes, is $2,500.. your car payment should be no more than $500 a month.

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Is Refinancing Your Car Loan Worth It?

If you’ve ever wished you could just hit a reset button on your car loan, refinancing is about as close as it gets. It’s swapping your current car loan for a newer one.. usually with better terms.

The main reason folks consider refinancing is to cut costs, plain and simple. Sometimes life changes, interest rates drop, or your credit score jumps.. suddenly that original loan doesn’t look so friendly anymore.

Refinancing is all about giving yourself a second shot at a better deal. So how does it work and shat is involved?

How Car Loan Refinancing Works:

Here’s the basic idea: You apply for a new loan with a lender.. this could be your current bank, another bank, or a credit union. If you’re approved, this new loan pays off your existing car loan. After that, you start making payments to the new lender instead.

The main goal? Lock in a lower interest rate, shrink your monthly payments, or get more time to pay off the car (sometimes all of the above). People usually refinance when they qualify for a better rate than what they first got…maybe you’ve improved your credit, or maybe rates have dropped across the board.

The Refinancing Process – Step-by-Step:

Refinancing a car loan isn’t complicated.. but there are a few things you should know:

  • Check Your Numbers
    Look up your current loan balance, interest rate, and payment history.
    Check to see if there is any prepayment penalty on your current loan.
    Check your credit score.. this plays a big part in the rate you’ll get.
  • Shop Around
    Compare offers from banks, online lenders, and credit unions.
    Don’t settle for the first offer. Quotes are free, and five minutes can save you a lot.
  • Apply for the New Loan
    Submit an application with some basic info about you and your car.
    The lender may ask for proof of income, insurance, and car details.
  • Get Approved and Finalize
    If you’re approved, the new lender will pay off your existing loan.
    You sign a new contract, and going forward you make payments to the new lender.

Does Refinancing Make Good Sense?

Refinancing makes perfect sense if rates have dropped since you tool out your original loan. If the rate you are paying is higher than what is currently being offered.. or if there are some special offers from lenders.. why would you not want to take advantage of that?

Also.. maybe your credit wasn’t perfect at the time you purchased your car. If you have paid on time and paid down your debt.. your credit may have improved.

Higher credit scores can often make you eligible for lower rates from lenders. It is your reward for establishing solid money habits. Lenders now see you as a lower risk.

Are There Any Drawbacks and/or Risks to Refinancing?

Lenders are not refinancing your loan out of kindness.. they are still in business to make money. There are often fees associated with refinancing any type of loan.

  • Application fees: Just to get the process started
  • Processing fees: Extra costs for additional paperwork
  • Title transfer fees: Making your new lender the official owner of the automobile
  • Prepayment penalties: Some loans charge you for paying off the old one early.

Does Refinancing Have Any Impact on My Credit Score?

When lenders check your credit report.. this normally takes about 5 points off your credit score. However.. since this is a known fact.. you are allowed 45 days to get several quotes from different lenders.

So long as all of the credit inquiries are for the same purpose (obtaining a car loan) the 5 points will only be deducted once.