How much do you spend on owning your car? Well, the national average is around $9,600 per year according to AAA. In fact, transportation expenses are the second largest line item in the typical U.S. household budget. Obviously, nobody likes making car payments. Still, far too many people keep making the same payment month after month without even thinking about it.
There are lots of tactics to reduce your monthly car costs, but one of the biggest reducible chunks is probably your car loan.
If you want to cut your car expenses, refinancing your auto loan could be a great place to start. You may think that you won’t qualify, but it costs you nothing to make an inquiry. Even though the process is pretty simple, there are ways you can maximize savings.
#1 Timing Counts
If you’ve been holding your current auto loan for three to four years, you may be in the sweet spot for refinancing. Lenders like it when the resale value of your car is greater than what is owed on the loan.
This makes it more likely you’ll qualify for a better deal.
Now here’s a neat trick: If you refinance at a lower interest rate, you may decide to maintain the same monthly payment. Why? Because this way you’ll pay off the loan faster and also pay less interest. Some car owners save thousands of dollars this way. Even if you’re early or late in the life of your current loan, you can still take a shot at refinancing. In almost every circumstance, lower interest rates will save you money.
#2 Lower Monthly Payment?
Maybe. Let’s say you have some new monthly expenses, like a new baby, medical bills, or a home improvement project. In this situation, your primary goal might be to lower your overall monthly expenditure. Refinancing your car loan may help here. If you get a lower interest rate, you could end up with significantly lower monthly payments.
Before you sign, be sure the trade-off is worth it. For example, if your old lender charges an early termination fee (a.k.a. penalty clause, call provision or closing fee), the cost may outweigh the benefit.
#3 Protect Your Credit Score
How do you go about getting a refinanced car loan? Well, you could go asking around at different banks. But believe it or not, this could damage your credit score. Each individual inquiry is considered as a credit check. So if for any reason you’re turned down, it could ding your credit score. The good news is if you make multiple inquiries within 30 days for the same purpose (e.g. car refinancing) it only counts as one credit check.
#4 The Best Strategy
A more effective method for checking rates is to consult with an auto loan refinance network. These networks contact multiple lenders at once which counts only as a single inquiry. Also, since they contact many lenders, you’ll get various offers and can choose the one with the best rates and terms.
#5 One At A Time
Be careful not to get credit happy when refinancing your auto loan. For example, while refinancing, don’t apply for new credit cards or home equity loans. This simultaneous action could hurt your chances for loan approval. Better to refinance your car loan first, then apply for other credit later if needed.
#6 Don’t Give Up
Even if you get turned down or don’t find a better car loan, don’t give up hope. After a 6 to 8 month wait, it may be worth looking into refinancing again. Interest rates can change at anytime opening up new opportunities. Happy hunting!
Joe Campanella is the Executive Vice President, Business Development for CARCHEX, a leading provider of vehicle protection and vehicle inspection services. CARCHEX also helps consumers refinance auto loans, and works with nearly 100 auto loan vendors. Joe received his B.S. in Engineering from the University of Maryland. He is an Advisory Board Member for Mothers Against Drunk Driving – Maryland, and is a licensed property & casualty insurance producer in 45 states.