Do you currently have a car loan? Are you considering refinancing your auto loan as a way of making sure you’re getting the best deal on your payments?
Before you begin, you’ll need to consider all the pros and cons of refinancing a car. Why refinance? Refinancing is a great way to lower your monthly payment, improve your cash flow, and consolidate debt. However, there are several factors that you should consider before charging ahead.
When Does Refinancing Your Car Loan Make Sense?
If you are considering refinancing a car loan before jumping to make a quick decision, consider when it makes sense to do so. To make sure it’s the right choice for your financial situation, you need to consider a few things, like your credit score and whether the new loan has better terms. Below are a few things to consider.
Your Credit Score Has Improved
Has your credit score changed since your original car loan? If it’s improved, your better score may help you qualify for a lower interest rate
In that case, refinancing makes more sense than sticking with your existing loan. A better credit score means lower interest and better overall terms, so it’s a great time to make a change and start the refinancing process.
You Can Get a Better Deal
Refinancing your auto loan only makes sense if you can get a better deal overall, so pay attention to new interest rates and term length.
If the interest rate you qualify for today is significantly lower than your current loan rate, it may be a good time to refinance a car. If it’s the same or higher, it’s probably not the right time to refinance.
Refinancing your auto loan so you have a lower monthly payment can make sense if your income has dipped. The lower payment can help ease the strain on your monthly budget and if you don’t have one, think about creating a budget so you can better control all your finances.
Pros of Refinancing Your Car Loan
If you’ve decided that refinancing your auto loan is right for you, there are a ton of advantages.
Whether you’re looking for short-term help or long-term financial advantages, refinancing your car loan may just be the right choice for you. Here are the primary benefits of refinancing a car loan.
Reduce Your Interest Rate
When you have a better credit score, you’ll most likely see better terms on the type of loan you’re looking for, especially when it comes to interest.
Once your score improves after making successful loan payments, you can apply to refinance with a loan that has a lower interest rate. This means you’ll be able to pay off your loan much faster than before and potentially have lower monthly payments.
Lower Your Monthly Payment
If your financial situation has changed, you might find that making your monthly payment has become too difficult to manage.
You can do this by getting a new loan with a longer term. That way, you have more time to pay off the same amount, freeing up more cash each month for other expenditures.
Improve Your Cash Flow
Refinancing your car could give you access to immediate cash flow in certain circumstances.
If you have car loans for more than one vehicle, refinancing can be a great way to consolidate that debt. By taking out a new loan that covers the amount of all of your current auto loans, you’ll be able to streamline your payments, which makes loan management much more manageable.
Cons of Refinancing Your Car Loan
Making changes to your car loan also has disadvantages. Changing up your loan could bring about unexpected issues that are hard to deal with financially, so it’s best to be mindful of what road bumps there might be coming up.
So, just what are the disadvantages of refinancing a car loan? here.
Signing up for any loan often comes with a few fees, and refinancing is no different. Before you start the refinancing process, you’ll need to ask yourself if refinancing a car is worth it with all of these associated costs. These could include lender fees, title fees, closing fees, and penalties for closing your original loan early.
You Could End Up Paying More Interest
Depending on the reason you are refinancing in the first place, you could actually pay higher interest costs than what you have on your current loan. For example, if you need more time to pay back the loan and refinance for a longer term, you’ll end up paying more in interest even if the rate is lower.
A longer term could mean that you’ll end up paying more for your car than you would have with the original loan. If you factor in the depreciation, your new loan can become excessively costly. Additionally, the older your car gets, the more likely it is that you’ll be spending money on repairs, another added cost to an extended term.
Refinancing your auto loan may sound like the best way to free up cash or lower your monthly payments, but before you make a decision, you should weigh the pros and cons listed above.
As you consider your current credit score and monthly payment abilities, don’t forget to think about the added costs in terms of fees as well. Take your time and do your research and consider both the pros and cons before making any decision and when in doubt consult a professional.