Refinance may lower your monthly payment, interest rate, or both.
Refinance an auto loan will result in higher interest rates, loss of equity, and additional expenses.
These are the benefits and drawbacks.
A Look At The Benefits Of Getting A New Auto Loan
You May Have A Lower Interest Rate
A higher interest rate can be obtained if your credit score has improved in the time since you purchased the vehicle. A strong payment history (between six and twelve months of regular payments) is a plus. To lower the car’s cost, you may have agreed to a higher rate than what was approved.
You may be able to reduce your loan rate by as much as 1 percentage point. This could save you enough interest payments to justify refinancing.
You Can Decrease Your Regular Payment
Refinance is an option if your car payments are too high. You’ll be able to pay more for higher-interest bills if you make a lower payment. This can be a great option when money is tight, like when your wages drop.
You may be able to avoid falling behind in payments by refinancing to a low-interest rate. You can reduce your monthly payments by extending the loan. This will increase your interest.
Your Loan Can Be Repaid Sooner
Refinancing is an option if your income has increased since the purchase of the vehicle. Refinancing may be an option, even if you are already paying extra for vehicle loans. This will allow you to pay more towards the principal and reduce your overall interest costs.
Borrow Against The Value Of Your Car
With a cash-out car refinance loan, you can use the value of your vehicle as collateral for a loan, potentially satisfying a financial shortfall.
The Downside Of Car Loan Refinancing
Although there is no guarantee that a refinance will pay less interest or have fewer fees, most borrowers who refinance will end up paying less and paying off their loans faster.
Additional Interest Charges May Be Incurred
Refinances with a longer term may result in higher interest payments over the loan’s life. The reduced interest rate may not be worth it for an additional year or two.
In Some Cases, Fees May Be Incurred
Ask your lender whether you will be subject to a prepayment penalty if your loan is paid off early. Your state’s laws may require you to register your vehicle or transfer the title. You may also be charged an application fee by your lender. Consider the amount you’ll spend on fees, and how much you can save by refinancing.
Inverse Situations Are Possible
Your car’s value may be less if you extend your loan, or cash out equity. Lenders would expect that you pay the difference if you sell or trade-in your car.
Advice On Figuring Out If It’s In Your Best Interest To Refinance Your Car Loan
- First, know exactly what you want to achieve. Is it your goal to reduce your payments each month, pay off your loan faster, or meet an unexpected financial need? When applying for a refinance and doing the math, it helps to have a clear idea of what you hope to achieve.
- You should look into loan refinancing options. Compare refinancing rates and terms from many institutions to discover the best fit.
- Do the math. To calculate the savings and costs of refinancing a car loan, you can use our car refinance calculator. Find out how much interest you could save if you refinance.
