Refinancing an auto loan to take advantage of lower interest rates can be a wise move. However, you can only take advantage of these lower interest rates if your credit score is good or at least above average. If you have a bad credit score, your chances of getting a better car loan than that which you currently have is low.
Car Refinancing
When you refinance a car loan, you take a new loan from a new lender to pay back the outstanding debt on the current loan. These loans are only justifiable when you get a new loan with significantly better interest rates than your current loan. For example, if you have a $20,000 loan with a five-year payment term at 10 percent APR, you pay about $425 per month. A new loan that charges you 6 percent APR will lower your payment to $400 per month, according to Bankrate.com.
Credit Scores
Your chances of getting a more competitive auto loan largely depends upon your credit score. The FICO score, one of the most widely used scores, ranges from 30 to 850. The Federal Citizen Information Center reports that a good score is anything over 700, while anything under 600 is considered low or subprime. However, lenders establish their own requirements, and some may require you to have scores about 750 or higher before you can get the best rates.
Shop Around
In the marketplace of lenders and borrowers, no two situations are alike. Different creditors use different factors to evaluate a borrower, and each lender has its own rules about what to offer when refinancing an auto loan. If you're rejected by one lender or offered terms that aren't acceptable to you, seek out other lenders. Remember, each lender competes against the others in an attempt to win customers, and the wise consumer uses this competition to find better offers.
Improve Credit
If your credit score is too low, you have almost no chance of getting a competitive car loan. However, you can increase your score and, once it is high enough, take advantage of a better loan. The Federal Trade Commission recommends some simple steps to raise your credit score. Start by paying all your bills on time, all the time. You should also reduce your credit card debt if you have any, preferably by paying off any balance at the end of each month.
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