Family Budget – When Should I Refinance My Car?


If you have a car loan, you might find yourself asking “Should I refinance?” With so many families struggling to find a family budget that works for them, making a high car payment each month can sometimes be one of the many reasons for a budget failure. Figuring out if you should refinance your car can be just as stressful as when you first applied for your car loan, but doing so can improve your finances in so many ways that it’s totally worth it. I want to make something completely clear upfront though before we get to looking at why you should refinance and when. I am not telling you to take a car loan. In fact, I think you’ll be much better off if you don’t. For those of you that already have a car loan though, refinancing it can be a great way to save money over the life of your loan.

When Should You Refinance Your Car Loan? - Wondering if you should refinance your car loan? I'll tell you when the best time to do so is, why you might want to and give you tips for getting it done right!

Refinancing is something that a lot of people think about but don’t necessarily do. It seems to be one of those “forgotten” ways to save since a lot of folks are under the impression that once you take a loan, you’re stuck with the rates that you’re given and with the length of time for the loan. That isn’t necessarily true. Refinancing your car loan can often help you have a lower interest rate which means lower monthly payments and change how long your loan is for meaning that you can often save quite a bit of money just by refinancing.

Family Budget – When Should I Refinance My Car?

If you do currently have a car loan, you really should be doing everything that you can to pay it off. There are quite a few ways that you can pay off your debt much quicker than you might think. You could pick up an easy side job to pay off your debt. You could use my system for adding $225.00 a month to your income and use that money to pay off your debt. You can go work at McDonald’s if you need to. The best way to save on your loan is to simply get it paid off quicker.

If you are already doing that and you still need to refinance, your best chances of getting a car loan refinance approved is with a smaller credit union however, if you’ve been with your current bank for a while and your checking account is in good standing, check with them first. Your regular bank is much more likely to approve your refinance since they are already familiar with your finances. With that being said, if they don’t approve you, don’t try too many others. Each time you apply will show as a hard inquiry on your credit report which does significant damage to it. So how do you know when you should refinance your car? Ask yourself a few questions:

How long has it been since you financed your car? – The first thing you should ask yourself when you’re playing the should I refinance game is how long it has been since your car was financed. The length of time that has passed since you’ve taken your car loan needs to play a part in answering your “should I refinance” question. If it has been under a year since you took your car loan, it’s very likely too early to refinance. If however it has been 18 months or more, you should consider refinancing your car. Interest rates and promotions can change in that time meaning you’re very likely to get a much better deal on your rates. By waiting at least 18 months, you also give yourself the time needed to show that you are indeed making your payments on time which can increase the chances of your refinance application being approved.

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Have interest rates dropped? –  This one goes along with the first question, but is something you should also check separately. If you initially financed your car at a high interest rate, check to see if your bank is offering a lower one now. You may be able to refinance for a shorter term with similar or lower payments and pay less interest while paying off your loan at a faster pace. If interest rates haven’t dropped or have raised by chance, skip the refinancing since it likely won’t do you much good to do so.

Has your income increased? –  No matter how wrong you might think it is, a lot of banks will actually charge lower income families a higher interest rate due to their loan being considered “high risk.” If your income has increased significantly, you might want to consider if it’s time to refinance your car loan. Each bank will have their own guidelines for what qualifies as high risk and they’re not very likely to tell you so be certain that your income has truly increased instead of just a bonus or single payment that raises it for a week or three.

Has your credit score improved? –  Your credit scores will play a huge part in the should I refinance game. If you’ve been working on getting out of debt and your credit score has improved, it’s definitely time to try and refinance your car loan. A higher credit score often means that you will get a much lower interest rate which means that you’re paying less money out of pocket in the long run. Not only that, but you’ll likely get a lower monthly payment each month too meaning that your budget will be eased a bit by lowering your monthly expenses. I would recommend that your FICO score be above 700 before you make this the sole reason you’re attempting to refinance. If you aren’t sure of yours, sites like MyFico offer a way to monitor your FICO score for a fairly affordable cost.

Has your credit score decreased? –  If by chance your credit score has decreased, it may be best to wait before you try to refinance your loan. A lower credit score will usually only result in your refinancing application being denied or a much higher interest rate than you are currently paying. Getting a denial can hurt you in the long run too since those inquiries are a hard hit on your credit report and will only serve to lower it even farther. If your score is low, consider signing up for a reputable credit monitoring site like Credit Sesame. They offer free score monitoring plus protection against identity theft for free. Knowing what your score is the only real way to know whether the work you’re doing to raise it is working.

Have you recently filed for bankruptcy? –  Bankruptcy is never a good option, but unfortunately some feel that they can’t avoid it and file.  When you’re asking yourself that “should I refinance” question, you’ll want to take a look at if you’ve recently filed. Regardless of whether you filed Chapter 7 or Chapter 13, if you have filed within the last few years, you’re unlikely to get a new loan or to be able to refinance. Once you’re out of the bankruptcy shadow, look into rebuilding your credit score using tools like the ones mentioned above and for a year or so to help rebuild your credit profile. Once you’ve done that, getting a secured credit card can help rebuild your score even more to get you to a place where you are ready to really look at refinancing your car loan.

Are you leasing your vehicle? –  For whatever reasons, a lot of people choose to lease their vehicle instead of buying it. Leasing a car often comes with a very monthly payement and big “balloon payment” at the end of your lease. If you’re locked into a lease, consider buying the car that you’re leasing before your lease is actually up. To do this, talk to your bank about a refinancing option to see if they can roll the lease into a car loan. Doing things this way can often avoid a big “balloon payment” at the end of your lease and will usually lower your monthly payment as well.

Make sure that before you even attempt to refinance that you take the time to take a look at your finances as a whole. If you don’t, you could be missing something in your financial picture as a whole that will only serve to damage your families budget and in some cases, future. Debt isn’t always that answer and in fact, I believe that the majority of the time it can be avoided even with things like buying a car or avoiding a student loan. If you’re currently locked into a car loan though, refinancing just may be the answer you need for a lower interest payment and lower monthly payments that will allow you to pay off the loan as a whole much quicker than you currently are.

When Should You Refinance Your Car Loan? - Wondering if you should refinance your car loan? I'll tell you when the best time to do so is, why you might want to and give you tips for getting it done right!

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Stacy Barr
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Stacy Barr

Stacy Barr is the face and brain behind the frugal living and lifestyle blog Six Dollar Family. A true gypsy soul, her newest blog, Unsettled Hearts, chronicles the journey of her family to become full-time travelers. By the age of 30, Stacy had overcome an alcohol addiction, a drug addiction, divorce, survived domestic violence and had built a life for herself and her daughter after spending 10 months in a homeless shelter. Her book, also called Six Dollar Family, has sold more than 7,000 copies since its release.

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