The coronavirus pandemic is creating financial hardships for many. A record 3.3 million unemployment claims came rolling in, according to a March 26, 2020 report. That’s nearly double what economists forecasted. To make ends meet, households are looking at every option available. If you’re worried about your budget, refinancing an auto loan could be a great choice. Here’s a look at what refinancing auto loans during coronavirus involves, how it could help, and how it compares to other approaches that may be on the table.
Lower Payments with Auto Loan Refinancing
If you haven’t lost your job due to COVID-19, then you might be able to snag a lower interest rate if you refinance your auto loan. On average, consumers saw their interest rate drop by 2.4 percent with a refinance. That would create a savings even if you don’t shorten your term.
For example, a $10,000 remaining balance at 6 percent with 36 months left on the loan comes in with a $304 monthly payment. If you knock off 2.4 percent, that makes the interest rate 3.6 percent. With that, your payment 36-month term payment would drop to $293.
If you can secure the new rate and lengthen the term to 48 months, your payment goes down substantially. You’ll pay $223 per month, which is $81 less than you paid previously.
It’s important to note that not everyone will qualify for a lower rate. If your credit score isn’t comparable to or better than what you had when you first secured the loan, you could see a similar or worse rate.
However, depending on the new term length, you may be able to shrink your monthly payments even if your rate is higher. For example, using the same $10,000 loan example above, if you refinance at 7 percent for 48 months, that monthly payment falls to $239. If you can stretch it out to 60 months, you’d pay $198 per month with a 7 percent interest rate.
How Auto Refinancing During Coronavirus Helps
The clearest benefit of refinancing your auto loan is potentially securing lower monthly payments. It can ensure that you make progress toward paying down what you owe while creating space in your budget.
In some cases, an auto loan refinance will also give you a short breather. You might get more than 30 days between your last payment on your original loan and when the first payment of your new loan needs to post. If you need a short reprieve, you could end up with one without needing to qualify for special programs or make any kind of request from your lender.
Who Qualifies for an Auto Loan Refinance?
It’s true that not everyone can refinance an auto loan, regardless of the COVID-19 outbreak. You have to demonstrate that you’re a safe risk to the new lender. Plus, you can’t owe more than what the car is worth, in most cases.
If you’re unemployed or your income has fallen because of the coronavirus, qualifying may be challenging. Having a low credit score is also a hindrance and could make you ineligible in the eyes of many lenders.
Owing more than the car is worth is also problematic for lenders. If you can’t make a down payment to ensure you are no longer underwater, securing a new auto loan might not be possible.
However, don’t panic yet. There may be other options that allow you to reduce your financial burden and keep your car.
What to Do If You Can’t Pay Your Auto Loan During COVID-19
If you are struggling to pay your auto loan and refinancing isn’t a viable option, contact your lender. Many banks and credit unions are working with borrowers during these troubled and unpredictable times, and new programs are emerging on a near-daily basis.
Call your lender directly and let them know that you were negatively affected by the coronavirus. Express your concern about being able to pay your auto loan and see if they have options that can help.
Some lenders are offering payment deferrals for a variety of consumer loans, including auto loans. Others may lower interest rates, waive fees, or provide other cost-saving solutions.
Qualifying for assistance means meeting your lender’s requirements. Those can vary from one institution to the next, so you’ll need to contact your lender for additional details.
Has the coronavirus outbreak impacted your financial plans? Do you think refinancing auto loans during the coronavirus may help you weather the storm? Share your thoughts in the comments below.
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