Have You Considered A Refinance?
If you have a car payment you’d like to lower, or pay off sooner rather than later, then an auto loan refinance might be a good option. But it’s important, as with all financial decisions, to look at the situation from all sides and make sure it’s the right choice for you.
First we’ll cover a few reasons that a refinance could be the right choice, then a few mistakes to be sure you avoid.
Lower Your Monthly Payments
Most of the time, people seek car loan refinancing to lower their monthly payments. This priority is understandable because monthly car loan payments can have an immediate impact on a household’s monthly finances. However, your monthly payment should not be your only consideration when refinancing as the sections below describe.
You have two ways to lower your car loan monthly payments. You can get a lower interest rate, you can extend your loan term, or you can do both. Usually, the best way to lower your car loan payments dramatically is to extend the number of months over which you pay for your car. However, when you extend your loan term, you may end up paying more for your car in total than you would without extending it. Still, if your lender allows you to extend your loan term and gives you a lower interest rate, you may both lower your monthly payments and pay less in total for your car. The example below will illustrate how this outcome can occur.
Decrease Your Interest Rate/Reduce Your Interest Charges
While it is interrelated with the goal of lowering monthly payments, some refinance customers prioritize lowering the interest rates on their loans. If during the course of your car loan, you improve your credit worthiness in the eyes of lenders (they sometimes evaluate you according to the Four C’s of Credit), then you usually can get a new loan on your car with a lower interest rate, and when you lower your interest rate you may reduce the total interest charges you pay on your car loan – assuming your car loan term is not extended or not extended by too many months.
Change The Length Of Your Loan
Sometimes refinance customers seek refinancing with an aim to change their loan term lengths. However, this goal usually has more to do with lowering monthly payments than just changing how many months over which a customer pays for his/her car.
Remove Or Add Someone As A Co-Signer To Your Loan
For various personal reasons, sometimes car loan borrowers want to refinance to remove or add someone to their car loans. Refinancing is an easy way to take someone off of your car loan because the refinance process gives you a new loan with a new contract.
– via www.ifsautoloans.com
Mistakes to Avoid When Refinancing
So let’s say an auto loan refinance sounds good to you and you’re ready to move forward. What do you need to watch out for along the way?
Here are a few important tips to keep yourself safe throughout the refinance process.
Refinancing might be tempting, but it’s easy to end up spending more money than you need to. Avoid the most common pitfalls – especially if you only have a few years left on your auto loan.
Stretching it out: a longer term loan usually means you’ll end up paying more for your car. It might be tempting to switch from a 48-month loan to a 72-month loan, but you’ll probably pay more in interest over the life of that longer loan than if you leave things as they are. Longer terms lead to lower payments – which can provide important relief in your cash-flow situation – but higher overall costs. Again, an amortization table can show you how your interest costs add up over time.
Upside-down: extending the life of your loan also leads to your loan being upside-down. This happens when you owe more on your car than it is worth. In other words, you’d have to write a check to your lender if you decide to sell the car, and that’s never a good place to be. You’re required to keep making payments (to avoid damage to your credit) even if the car breaks down and becomes unusable. It’s best to pay off loans quickly so that you can easily sell (and possibly buy a different, inexpensive car) if the need arises.
Prepayment penalties: although rare with most auto loans these days, prepayment penalties still exist. Make sure it won’t cost you to pay off your existing loan early. Penalties can eat up any savings you’d get from a lower interest rate.
Waiting too long: if you’ve run the numbers and you know it makes sense to refinance an auto loan, waiting can cost you. Rates are generally best on newer vehicles, and some lenders won’t refinance loans for cars over a certain age (seven years, for example). You might even get a “new car” rate if you refinance immediately after buying from a dealer and taking advantage of dealer incentives.
Missing payments: stay involved during the refinancing process, and don’t assume anything is completed. You might think your existing loan is paid off and you can stop sending payments, but any delay in the process can result in a “missed” payment – which can damage your credit and your ability to refinance. Confirm with both lenders before you stop sending money.
– via The Balance
After learning more, do you think a refinance might be right for you?