The Pros And Cons Of Refinancing Your Car Loan

Posted by auto on August 20, 2019 @00:14:38 EST

No matter why it is you need your car, odds are that you simply can’t do without it, and that’s part of what makes your car loan such a crucial part of your overall financial health. People make use of their vehicles for a wide variety of reasons, among them meeting up with friends, performing everyday tasks like shopping and grabbing a coffee, as well as actually going to and from the job you have that will enable you to pay back the money you owe on your deal.

It can get a little overwhelming, though. After all, payments need to be made every month, and they’re more often than not sizeable enough to require serious thought and financial planning. For many of us, the first car loan deal we ever negotiated probably wasn’t as good as we could possibly make it. This is partly down to inexperience, but it also relies on a range of different factors, such as your credit score, credit history, and current income stream.

For example, a poor credit score is likely to get you saddled with a sub-par loan, because it represents to the dealership that you haven’t always been 100% reliable when it comes to paying off your financial commitments. This could manifest in a few different ways, of which increased interest rates and longer loan terms are only the most obvious too.

However, it’s entirely possible that you could have improved your credit score drastically from the last time you tried to negotiate. This would lead you to a whole score of different benefits—all of which are based on the fact that if you went to a new dealership with your improved score, you’d likely get a better deal.

Deals Aren’t Forever

What many people aren’t aware of, however, is that you don’t actually need to stay locked in to the deal you made in the first place. The process of coming up with a new agreement is known as car loan refinancing, and while it can seem dauntingly complicated to those of us who are already sick to death of bureaucracy, agreements, and paperwork, the financial benefits can often be so significant that it really is a good idea in a majority of cases.

But that’s not to say that there are no downsides to car loan refinancing. Like every decision we make in life, there are positives and there are negatives to agreeing on a new payment plan for the automobile you’re already using. Unfortunately, the Internet is awash with colossal volumes of articles and blog posts on the subject, each of which claims to have the final word on whether or not car loan refinancing is right for you.

That’s why we’ve decided to put together a brief overview of the main pros and cons to car loan refinancing. As ever, we don’t claim that this is the be-all, end-all on the subject—that’s just not the case, and we wouldn’t be doing you or ourselves any favors by claiming it is. What we can promise, however, is that this article will give you enough of an oversight to the topic that you’ll be able to have a firm base of knowledge for launching your own research. As is practically always the case, the best research is the research you do yourself.

That’s enough preamble, though. Let’s get straight into it. Here are the main pros and cons to car loan refinancing, listed in order of importance.

Pro 1: Potentially Lower Payments

Somebody counting pennies into somebody else’s hand.

One of the main pluses to coming up with a new car loan refinancing scheme is the fact that you’ll often be able to extend the terms of your loan. This will vary, of course, depending on which dealership you go to and what kind of deal you’re able to secure for yourself, but generally speaking, even adding to the length of the loan by a few short months can have an incredible impact on your overall financial health, as well as on the amount of cash you find yourself with at the end of every month.

It can seem like a strange idea at first (why would you want to lock yourself in to an even longer loan?) but bear with us and we’re sure you’ll see the logic behind making this decision. The main point you need to grasp is that by making the length of the loan longer, you’re automatically reducing the value of the monthly payments you’ll have to contribute every four weeks from your own pay-check.

While this can be more or less of a plus depending on your personal financial circumstances, it’s a fairly safe bet that most of us would like a little more freedom with regards to the amount of money we’re expending every month.

The other main idea is that even though you’re making the road to completely owning the car a little longer for yourself, you’ve already proven that you can commit to a longer-term deal, and as such the company with whom you negotiate your new deal (which doesn’t always have to be a new dealership; it could be the original lender from your first plan) are more likely to be open-minded when it comes to helping you out with things like repairs, which are often in the forefront of everybody’s mind as they try to avoid getting longer loan terms.

Con 1: A Lengthy Negotiation Process

Somebody looking over a sheaf of documents beside their cell phone.

One of the undoubted downsides to refinancing your car loan in Toronto is the fact that, no matter how you look at it, it’s going to take you a little bit of time. This comes about as a result of a few reasons, and we’ll go into them briefly here in order to explain why you should probably set a significant chunk of time aside in order to work on getting approved for a new deal.

The first issue is that in order to do the job properly, you’re going to need to window shop between a few different dealerships. After all, that’s the best way to ensure that the deal you end up signing is the best you can get, because you already know what’s available at other spots.

Depending on where you live, though, this can take anywhere from a few days to a week, or even more. We’d recommend getting at least 5 or 6 other dealerships on the line, in order to make sure you can have the best chance at getting a deal which is feasible long-term as well as a good fit for your current situation. You may have already had to do this if you were buying a used car, but you could well be unfamiliar with the process as well.

Another point is that there’s usually going to be a significant amount of to-and-fro between you and the dealership you eventually decide on pursuing an agreement with. Some people love this aspect of the negotiation process, while others would rather do without it. But the fact of the matter is that you’re just going to have to accept that renegotiating your car financing in Toronto will take a bit of time—we’d even go so far as to say it’s the most major downside.

Pro 2: Lower Interest Rates

A screen displaying price information in graph form.

This is another solely financial plus, but it’s a big one. On top of potentially extending the length of your loan (and as such lowering your monthly payments), lowering interest rates is the single best thing you can do for your ability to pay off the car loan refinancing scheme in full and on time, which itself will work wonders on your credit score.

The thing to understand is that money paid in interest (no matter what kind of car loan refinancing scheme you’re hoping to get) doesn’t go towards the value of the vehicle. You can think of it as a way to offset the risk the dealer is taking on by lending you the money in the first place. Interest rates increase as credit rates get lower, which indicates that the riskier the proposition, the more interest the buyer will have to pay.

For any car loan refinancing plan you’re thinking of putting into action, lowering interest rates should be one of your highest priorities. It’s effectively the same as drastically increasing the amount of money you’re paying towards the car, as opposed to just making the maths work out a bit better for the dealership. After all, actuaries are paid high salaries in order to compute exactly what kind of interest rates their clients should offer, so anything you can do to help get yourself onto the right side of that thin line is going to pay major dividends in the long-term—and any car loan refinancing plan is, by definition, a long-term commitment.

Con 2: Risk Of Damaging Relationships

This isn’t very likely to happen—and it really shouldn’t—but sometimes, people forget that business is business and personal stuff is personal stuff. We’re sure you can see where we’re going with this. If you’re unlucky enough to catch your dealership’s employees on a bad day, you could well end up tarnishing your relationship with the company as a whole. You don’t have much of a choice about whether or not they take it personally, and even though they shouldn’t, you can never be sure.

This isn’t ideal for a few different reasons. The most obvious one is that they might be unpleasant for the foreseeable future as you go around trying to come up with a new deal, and they might be less likely to give you a deal which is as favorable as it deserves to be. Another point to consider is that if you damage your relationship with your current dealership, the pressure is going to be increased on you to find a deal with another group, which is in turn going to have a knock-on effect on your ability to negotiate properly, since you’ll have so much of a vested interest you could well be at a disadvantage.

It is worth mentioning that dealerships who react in this kind of way are few and far between indeed, and the overwhelming likelihood is that you’ll never come across this situation I your entire life, no matter how much negotiating you end up doing for your car financing in Toronto. Just like with everything in life, though, it’s important to be prepared for as many eventualities as possible, so we decided to mention this as a potential con all the same.

Conclusion

There they are: the two main pros and the two main cons of refinancing your car loan in Toronto. Whether or not the pros outweigh the cons (or vice versa) for you is going to depend on your personal situation, which obviously nobody understands as intimately as you.

We hope that these guidelines can be helpful with regards to the eventual decision you’ll make, however. More than anything, knowledge is power, and it’s vitally important to arm yourself with as much information as possible before making any one decision, especially when you’re talking about long-term financial commitments.

As a final point, if you’re having a nightmare trying to refinance your car loan in Toronto because of your credit score, why not get in touch with our experienced team here at autoloans.ca? We’re proven experts at helping people to secure approval for all kinds of loans, irrespective of credit score, and we’d love to talk about how we could help you out of your current predicament.

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