Refinancing a car loan can seem appealing in time. It’s important to consider to make sure you benefit from refinancing. Refinancing has both profiles and cons. Depending on your situation. Making educated decisions about your finances will keep you on track for financing.
Car loan refinancing profit
• You can reduce the interest rate: One of the best reasons for refinancing a car loan is to reduce the interest rate.
If you have no credit or bad credit, it is worth checking to see if you have paid a car loan after a few years. Your credit score may have improved enough to qualify for a lower interest rate. With a lower interest rate, you can pay off your loan faster or save money while repaying your loan.
• Increase cash flow: If you currently owe less than what your vehicle is worth, you may be able to access more cash through refinancing. For example, let’s say you kept your vehicle for three years. Your vehicle is currently worth $ 8000 and you still owe $ 5000 for your car loan. You need money for a little home repair. One option would be to refinance your vehicle for $ 6500. You will still owe less than what the vehicle is worth and have $ 1500 after the new loan pays off your previous balance of $ 5000. $ 1500 can now be used to improve your home .
• Reduce your payments by extending credit: Sometimes a life-changing event such as a baby, unexpected medical expenses, or a natural disaster can put you in a situation where you absolutely have to reduce your monthly expenses. Refinancing allows you to extend your credit. For example, if you owe another two years for your current loan, it may be possible to refinance and extend the term up to four years.
Adding two years to your loan should significantly reduce your monthly payments depending on the interest rate you receive. You will pay for two more years, but you will release cash on a monthly basis, helping you get through the rough patch. However, keep in mind that this will also mean that the total amount you will pay over the life of the loan will be higher (which we will discuss below).
• Change lenders: Changing lenders can be a pro or con depending on the relationship you have with your lender. If your lender is having a hard time contacting or not getting your payment information, changing lenders can be a pro. If you like the lender, you can try refinancing them, but you may need to look elsewhere to get the best rate.
The confusion of refinancing a car loan
• You will pay more interest on the length of the loan: Sometimes you can refinance at a lower interest rate, but since the loan is extended, you will actually pay more than the length of the loan. Use a credit calculator to make sure you know whether or not you are saving money. Getting a lower monthly rate may be what you’re looking for, but if you really want to pay less at all, it’s important to do the math.
For example, if you have a $ 5,000 loan with a 10% interest rate paid over 2 years, you will pay a total of $ 5537. However, that same 5-year extended loan will end up costing you $ 6374 – that’s $ 837 you could spend on something else, so make sure you only extend your credit if you really want it!
• Paying a higher interest rate: Losing cash is sometimes the only reason for refinancing a car loan. Even at higher interest rates because most borrowers charge higher interest rates on older vehicles. If you are going to refinance your older car, you may be surprised at the interest rate available to you. It is often lower than your credit card, although your vehicle is used as collateral.
Consider all your options before you begin refinancing your car.
Check to see what interest rates are available. Keep the length of the loan as short as your budget will allow. Obtaining the shortest loan combined with the lowest interest rate will ensure that you get the best possible car loan.