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When I was 18 I came up with this bright idea to buy a new car.
It will be fun, I said.
It will be exhilarating, I said.
It would ruin my life.
Refinancing my auto loan saved not only my sanity but also my budget. I was able to reduce my interest rate by over 7% and lower my payment by $114!
If the costs of your car are eating you alive, check out these tips on how to refinance your car loan!
Increase your credit score
First things first, you’ve got to get your credit score in tip-top shape! There’s no point in going through the process of refinancing if you’re just going to save a few dollars.
We want to save big bucks, so getting your score to at least a 700 puts you in the position to qualify for the best interest rate.
I won’t lie and say that this part is easy. Building your credit score takes a lot of research, consistency, and patience. After a year of on-time payments, my credit strengthened, but it was still not high enough to better my situation.
Every lender turned me down with denials of having too many inquiries, not enough credit history, or simply not meeting the minimum credit score requirement.
Discouraged, I continued researching ways to establish good credit and was able to increase my credit score by 100 points by using credit cards to my advantage.
When I became confident with my score I submitted an application with my local credit union. It was approved and I was able to refinance my car loan from roughly 9.25% to 2.19%.
For help building credit or improving your score, be sure to check out these posts:
Know your car’s value
It’s important to know the value of your car in comparison to the payoff amount of your loan. New cars lose roughly 20% of their value during the first year and continue to depreciate in value each year.
This means that there’s a high probability you will be upside down or “underwater” on your car loan, which is when you owe more than what your car is worth. Before you refinance, some lenders may require you to make a lump-sum payment to help bring your loan above water. My credit union requested that I bring my loan down by $1,000 before sealing the deal, which I paid using my tax refund.
I suggest saving money beforehand if you owe more than your car’s value to pay down your negative equity. This way, if the lender requests you pay down your loan first your application process won’t get hung up because you already have funds available.
Shop around for the best interest rates
After strengthening your credit score, shop around for the best interest rates. Submitting an application to refinance will be considered a “hard pull” on your credit report so make it worthwhile!
Don’t just run with the first offer you see. Increase your chances of snagging the best rate by exploring all of your options.
I suggest going with a credit union versus a traditional bank as they often offer the lowest interest rates. This is because most are non-profit, so they reinvest back into their programs thus given them the ability to offer lower interest rates.
After researching what the banks in my area were offering, I decided to apply with a local credit union and managed to lower my interest rate from roughly 9.25% to 2.19%. This dropped my payment from $459 to $345.05! Needless to say, it was one of the best days of my life.
Keep your term the same or shorter
When you refinance your car loan, keeping the term the same or shorter than the original is crucial to maximizing the benefits of a lower interest rate.
It’s important to make sure you will not be paying more over the life of the loan by giving in to the temptation of a longer-term. Stretching out the terms of your car loan can make it appear as though you are saving money, but add in all of the interest that will accrue and you’ll be paying out more than you were formerly!
When I refinanced my auto loan I made it a point to keep my term exactly the same to avoid adding extra time and money.
Opting for a shorter term will save you the most money but your payment will likely increase since you’re paying off the loan in a shorter amount of time. If you’re not financially prepared to take on a larger payment, stick with your current term.
Additional posts to check out next:
Pay more than the regular payment
To take full advantage of your new interest rate, always seek to pay more than your regular payment. Whether it’s an extra $10 or $200, this will help to cut down on interest charges thus knocking down your principal balance faster.
While I was paying off credit card debt, I applied an extra $30 or so because it was all I could afford at the time. This small amount made a world of difference.
Since I was able to snag a 2.19% interest rate, applying this extra $30 kept my interest under $20!
Break up your payment into two
If your lender allows, take your auto loan payoff up a notch by making bi-weekly payments. When you break up your payment you help to reduce the amount of interest accruing and wind up making an extra payment each year!
Choosing to refinance your car loan is a great way to pay it off faster by lowering your interest rate, and maybe even your payment! Doing this has allowed me to pay off my auto loan nearly twice as fast, saving me a ton of money over the life of the loan. And for a single mom of two, it was one of the best moves I could’ve made for my finances.
Resources to check out!
The “Broke” Girl’s Guide to Saving Money course. Don’t know where to start when it comes to saving money? Or, do you wind up quitting because you always find you need the money you contributed right back?
If so, you need this FREE course!
- The first step you need to take towards saving (it’s not what you think)
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- How to keep your head in the game so you don’t wind up quitting…again
$1,000 in the Bank
Just a few years ago, I was a single mom making under $20K a year with zilch in savings. I could barely afford to contribute $15 without needing it right back. Now, I’m contributing $200 per paycheck while financially supporting two kids on my own. If I can do it then you can too and I can show you how.
In the $1,000 in the Bank eBook, I’m giving you the five steps that have helped me save consistently, even when extremely low on income.
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This eBook comes with your own $1,000 savings spreadsheet that will calculate how much you have saved and how much you have remaining until the goal is reached.