Refinancing a car is taking a new loan in the bid to pay off the existing balance of your car loan. The new loan is a brand-new loan, probably with another lender with different terms and conditions. The secured loans are then paid off in fixed monthly installments over some time.
People refinance their auto loans to save money. This is because refinancing scores the borrower a lower interest rate, decreasing the monthly payments and freeing up cash to cater for other financial obligations.
Refinancing could also find the borrower another loan with more favorable interest and extended repayment methods, ultimately lowering the monthly payments. Car refinancing makes sense when
The borrowers’ credit score has improved:
By having a better credit score, you can qualify for a loan with a lower interest rate and APR
Your first deal wasn’t the best:
If a lender offers you a better deal than the one you started with, refinancing your car makes perfect sense because the new lender will give you better terms.
Changes in your financial situation:
A difference in your financial situation could get you the means to pay off your car loan with a large payment or lower your monthly installments.
Advantages of Car Refinancing
There are several benefits associated with vehicle refinancing. They include
A Lower Interest Rate
A lower interest rate is critical and helps you save money on the loan costs. Suppose you had a bad credit score the first time you got the car loan and got a high-interest rate, and your financial situation has dramatically improved. In that case, you should refinance your car to qualify for a lower interest rate.
Lower Monthly Payments
If you decide to lengthen your loan term, then your monthly installments will decrease. If you get a lower interest rate, the monthly payments will also be lower.
With a positive equity, you can earn yourself some money for other expenses. Positive equity is where the value of your car is more than the loan amount. You can take out additional cash and use it with different costs by refinancing your car and using it as collateral.
Getting a new lender drops down to convenience. If you are looking to move from dealer financing to financial institutions, or you don’t like your current lender, refinancing your car sounds perfect.
Disadvantages of Car Refinancing
There are potential downsides of refinancing your car, and they include
Lower credit score
Before making the final refinancing offers, the lender will always pull a hard credit check, and this will always affect your credit score whether you choose to refinance or not.
You will pay more for your car in the long run
If you choose to lengthen your loan term and lower your monthly installment, then you will have spent more interest over the loan’s life.
You risk losing your car
If you had good equity and chose to use your car as collateral for cash and fail to make payments, the lender may decide to repossess your car.
Is It A Good Idea?
According to experts at Lantern by SoFi, refinancing your car is a good idea if your situation has improved since the last time you took the loan. Car refinancing offers the borrower some bits of freedom that enable them to pay off their other debts and affords him the reason for a fresh start.