Refinancing an Auto Loan - The Advantages and Disadvantages?
Did you take an auto loan to buy your car? Taking an auto loan is the best decision since it will allow you to safeguard your financial future. However, your auto loan can become a massive problem if you start running low on funds. The good thing is that you can refinance your car loan if it becomes a burden.
Refinancing your car will allow you to save your hard-earned money in the end. It will also improve your financial situation. But it is vital to consider your options before making your ultimate decision. This article will help you know how auto loan refinancing works and when it makes sense.
How Does it Work?
Most people think they have everything planned out before applying for an auto loan. However, unfavorable economic situations and life's unpredictability can make it hard for you to repay your loan. Refinancing your auto loan is the best thing to do if things are looking grim at the moment. It will allow you to overcome your financial burdens. You will also be able to keep your car.
When refinancing your auto loan, you will have to take a new loan to service the previous car loans. A car, in most cases, secures these loans. Borrowers have to make fixed monthly payments over the course of the loan. These loans are popular because they have lower interest rates. This means you will be making lower monthly payments, saving you money.
Besides, you might find an auto loan with a more extended repayment period even if you fail to get favorable rates. You will still make reduced monthly payments, thanks to the extended repayment period. However, you might end up paying more due to the extended repayment period.
When to Refinance Your Auto Loan?
Several factors will come into play when deciding whether to refinance your car. The following are some of the essentials you should have in mind when making the decision:
Consider the Current Interest Rates
One of the things you should do before making this huge decision is to confirm if the interest rates have decreased since you took the car loan. You will save more if the interest rates have gone down. Let us put it into perspective, the total financing cost for a $25,000 auto loan with a 7% interest rate is $29,702. Refinancing the same loan in the second year for a 5% interest rate will amount to %23,214. This allows you to save around $2,488.
Your Credit Score Has Improved
It would also be wise to consider this option if your credit score has improved. Lenders will be more than happy to give you favorable terms if your financial situation has improved.
When You Need Better Terms
You can still refinance your car loan even if your financial situation has not changed. All you have to do is to shop around to find a more favorable option this time. To help you understand, you can find a loan with a 5% interest rate when your current loan has a 7% interest rate.
You Have Trouble Making Monthly Payments
Are you finding it hard to make the monthly payments? It would help to shop around for a car loan with an extended repayment period. You can also ask your lender to allow you to extend the repayment period. But you should remember that you might end up paying more interest.
When Not to Refinance Your Car Loan?
Refinancing your car loan might work for you in some situations. However, it will not work if you are dealing with the following situations:
You Have Already Cleared Most of the Interest
Borrowers pay most of the interest within the first months. When you have paid most of the interest, refinancing your auto loan is not such a good idea since you will not save much.
Your Car is Already Old
Sadly, cars depreciate quickly. This means that it is almost impossible to refinance your car after some years. Some lenders refuse to refinance old vehicles.
When You Want to Improve Your Credit Score
Do you want to apply for more loans soon? Well, refinancing your auto loan is not the best thing to do. It might harm your credit score, reducing your chances of getting more credit.
Understanding the Benefits and Disadvantages of Refinancing Your Car Loan
If you still have trouble making the final decision, understanding the cons and pros of refinancing a car loan might help:
Benefits of Refinancing
Lower the Interest Rate. Refinancing your auto loan is the best thing if you want lower interest rates. So, start shopping for a better option if you have a good credit score. Lower interest rates will allow you to save and repay the loan quickly.
Reduced Monthly Payments. Sudden life changes can make it hard for you to repay the car loan within the agreed period. For instance, a natural disaster or unexpected medical bills can put you in a position you never imagined before. Refinancing your car loan will give you more time to repay the loan and lower the monthly payments.
Quick Funding. Refinancing a car loan is the right approach if you want to improve your cash flow. However, it is vital to remember that cars depreciate quickly.
The Disadvantages of Refinancing
Although refinancing comes with several benefits, it is worth noting that it has some disadvantages. First, you might end up paying more than the original loan because you will be paying your loan over an extended period. You can use a loan calculator to make sure you are not paying more than you should. Moreover, refinancing will not work for you if your car is old. Lenders charge higher interest rates for older cars.
The Bottom Line
It is vital to look at all your options before making the ultimate decision. Use an online math calculator to do that math to ensure you are making the right decision. Remember to work with a reputable refinancing loan lender to get favorable terms.