The Pros and Cons of Refinancing a Car Loan
Refinancing your car loan can seem appealing when you’re running low on money or spot a better interest rate. Before making this decision, it’s important to thoroughly understand the pros and cons. Based on this information, we’re certain that you’ll be able to make the best choice depending on your situation.
Refinancing your car can be helpful in some situations:
- If you need to save money immediately, whether to free up cash for an emergency expense or because of a sudden drop in income
- If you have improved your credit score since you first took out a car loan, as you may have access to better interest rates
Reduce Your Interest Rate
A top reason to refinance your auto loan is if there’s the opportunity to reduce your interest rate. If your credit score has improved enough since your previous score, it is worth checking into refinancing your car loan after a couple of years to see if you receive better offers. You may have the opportunity to qualify for lower interest. “With a lower interest rate, you will be able to pay off your loan faster or lower your monthly payment while paying it off at the same pace.” With either case, you would be paying less over the life of the loan.
Lower Your Monthly Payment
Things happen in life. Expensive occurrences like unexpected medical bills, having a baby, or a natural disaster can create a situation where you must reduce your monthly expenses. Refinancing might allow you to extend the duration of your loan, thereby lowering your monthly payments. For example, if you owe one or two more years on your current loan there may be the possibility to refinance and extend the term longer such as to four years. This would all your monthly payments to be substantially lowered, depending on the interest rate you get. While you would be paying for more years, you’d also be able to free up cash on a monthly basis. However, it is important to keep I mind that this would also mean that you would pay more interest over the total loan life.
Improve Your Cash Flow
“If you currently owe less than what your vehicle is worth, you may be able to access more cash by refinancing. For instance, let’s say you have owned your vehicle for three years. Your vehicle is currently worth $8,000, and you still owe $5,000 on your auto loan. You need money for a small home improvement project. One option would be to refinance your vehicle for $6,500. You will still owe less than what the vehicle is worth and have $1,500 of new money available to spend after the new loan pays off your previous $5,000 balance.”
It’s important to note that a car is a depreciating asset that loses value over time. It can lose 10 percent of its value within the first month of ownership and more than 20 percent within the first year. You never want to risk owing more on your car than it’s worth.
Understand the Costs of Refinancing
“Sometimes you can refinance with a lower interest rate, but because the loan is extended, you will actually pay more over the length of the loan.” It’s important to use a loan calculator to make sure you are saving money overall. Things can be deceiving when you see a lower monthly rate, so you’ll want to do the math.
For example, if you have a $5,000 loan with a 10% interest rate paid throughout two years, you will pay $5,537 in total. However, that same loan extended throughout five years will end up costing you $6,374. That’s $837 that could have been spent on something else. So, make sure you extend your loan only if you need to do so.
Sometimes the only reason for refinancing your car loan is to free up needed cash quickly. Beware of higher interest rates! Most lenders end up charging higher rates on older cars.
Additionally, most banks will not charge an application fee for an auto loan refinancing.
If you’re having a hard time securing funding because of your credit score (and haven’t had the chance to work for long enough at your credit repair plan), why not consider giving us here at autoloan.ca a call? We consider every single application we receive, and don’t discriminate based on your current score, so you’ve really got nothing to lose by calling us up and seeing if there’s something we can devise to help you out with your current situation.