Done strategically, refinancing a car loan can afford you some distinct financial advantages. However, it’s important to have a clear understanding of why you’re doing it before you make this decision.
Here are five things to consider when refinancing car loans.
1. Why Are You Trying to Refinance Your Loan?
Your ultimate aim will help you determine your best course of action. Maybe you want to get a better interest rate so you can reduce your monthly payment—or just pay the loan off sooner. Perhaps you want to extend the length of your loan to lower the payment, so you can keep a bit more money in your monthly budget. Each of these scenarios requires a slightly different tack, so you need to get clear about what you’re trying to accomplish first.
2. Do You Qualify for a Better Loan?
If your credit score has improved since you took out the loan, you might qualify for a lower rate over the same term. If this is the case, you’ll benefit from refinancing the loan. Conversely, if your credit rating has dropped since you got the loan, you might be looking at applying for one of the applying for one of the bad credit, car refinance loans. This can still be beneficial but examine the numbers carefully to avoid worsening your situation.
3. Where You Are in the Life of the Loan?
Generally speaking, you’ll want to do a refinance as soon as possible in the life of your existing loan. If your loan agreement front-loads, most of your early payments go to interest rather than reducing the principal. Refinancing to a lower interest rate during this period will result in savings. If you’re late into the term of the loan, it won’t be as beneficial. Additionally, all things being equal, the newer the car, the better the chance you’ll have of getting the refi approved.
4. What Is the Value of Your Car?
This one dovetails into the last sentence above. Presumably, the newer the automobile (unless we’re talking about a collector’s car), the more valuable it is. If you made a significant down payment, this is even truer from the lender’s standpoint. If your loan balance is greater than the value of the car, finding a favorable refinancing deal is going to be next to impossible—if at all. Think about it. The car serves as collateral for the loan. Why would anyone lend you more against it than it’s worth? If anything, they’ll want to loan you less than its value so if something goes wrong they can sell the car and get their money out of it.
5. Does Your Current Loan Have Prepayment Penalties?
If your current loan has prepayment penalties, these must be also taken into consideration when you’re calculating the advantage you’ll gain from refinancing. Lenders use prepayment penalties to ensure they’ll profit from making the loan, regardless of how quickly you pay it off. When you refinance, the loan won’t go to term, so the prepayment clause will kick in. The exact amount you’ll owe will depend on where you are in the life of the loan, so you have to check with your current lender to find your exact payoff amount before you can decide whether refinancing makes sense.
Paying attention to these five things to consider when refinancing a car loan can be the difference between realizing a benefit or digging yourself a deeper hole out of which to pay.
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