Refinancing a car loan is a viable way to relieve financial burdens. However, it would be best if you weighed all your options before you decided. This article will give you all the info you need when you’re wondering should you refinance a car loan?
How Does Refinancing Work
Refinancing a car means replacing an existing car loan with a new current loan with different terms, just as you would with any other type of bill consolidation loan.
People refinance cars for different reasons, including:
- To save money
- To reduce monthly car payments
- To adjust the length of repayment periods
- For personal reasons such as removing co-signers from loans
Refinancing a car is dependent on several factors. Here are some situations where you could refinance your loan and save lots of cash in the long run.
A drop in the interest rates
Interest rates for loans are dynamic; thus, they change all the time. Even a 2-3% rate drop could save you a lot in the long run. For instance, if your initial loan was $50,000 with a 7% interest rate and terms of 60 months, you will end up paying $59,404. Following a year of payment, your loan balance will be $42,000. Suppose you refinance and get a $42,000 loan with terms of 48 months at 5% interest. That translates to $46,428. In the end, this will add up to $54,414, including the initial $8,000 dollars –$2,488 less than the original loan.
In Incase of Better Loan Terms
Interest rates and improving financial situation aren’t the only catalysts for loan refinancing; better loan terms are also worth exploring. In fact, this is one of the best times to get any sort of bills consolidation loan.
Improvement of Your Financial Situation
Lenders consider a lot of factors for loan appraisals, including your credit score and debt-to-income ratio. The latter is your monthly income divided by your monthly debt payments. So, if you reduce your debt-income ratio, you’ll likely get more favorable terms.
Difficulties in Coping Up with Monthly Bills
It makes sense to try to get a loan with a more extended repayment period if you can’t get a better rate. Consider trying to negotiate a more favorable payment schedule for the current loan. However, remember the more time you take repaying your loan, the more the interest.
When to Avoid Refinancing
Although refinancing a loan is good, it is not suitable for all scenarios. We recommend you avoid refinancing in the following situations:
- If you are finalizing the initial loan repayment. Since interest is a front load, you will save less in the long run because interest will accrue during processing.
- If your vehicle is old or has high mileage. Some lenders might not refinance cars of a certain age or mileage. This includes cars that are older than seven years or that have more than 90,000 to 125,000 miles on them.
- If you have a credit-improvement plan in place. We recommend that you refrain from auto refinance since it can impact your credit score negatively.
- When risks outweigh benefits. You also need to weigh the risks and benefits of car refinancing, such as prepayment penalties and additional interests. If the risks are more, consider other options.
Before you decide to refinance a car, do a thorough analysis. At times, you may be able to refinance a vehicle at a very low rate but end up paying more or saving less. Always use a loan calculator to confirm the possibility of saving in the long run.
Pros of Refinancing Car Loans
Refinancing car loans serves several purposes whose aim is to reduce interest and enhance convenience. Here are some of the benefits:
- Low monthly payments
- Longer repayment periods
- Low-interest rates
- Improvement of cash flow
- Better terms and conditions
In summary, always weigh the options you have before committing to refinancing. Run your numbers about repayment periods and interest rates to ensure that you’ll save in the long run.