Top reasons to refinance your car loan

For the financially savvy, refinancing a car loan is a great way to save money and improve financial health. Broadly, refinancing a car loan operates the same way as refinancing any other kind of loan, but some nuances are vital to consider. Refinancing a loan means that the borrower is replacing their current loan with a new one with better terms. However, before you make a decision, here are some vital pros and cons of refinancing a car to consider before moving forward.

Pros

Lowers Interest Rate and Monthly Payment

According to Lantern by SoFi, “Refinancing to a loan with more favorable terms can be a great way to lower your interest rate and/or monthly payment amount.” Interest rate is the silent killer in any financial arena. While it may seem like a tiny percentage difference at first glance, compounding effects can have someone owing much more than they initially thought. Lowering interest rates and monthly payments will save money in both the short and long term. Although this is a pro for almost everyone, it never hurts to crunch the numbers with a loan calculator and make sure that this would save money.

Cuts the Length of the Loan Down

Because of interest rates, the longer the length of a car loan, the more money the borrower must pay. Money from interest is why it is great to take any opportunity possible to lower the length of a loan, which is what often occurs when the borrower refinances. For people looking at the pros and cons of refinancing a car, this can be a massive pro because of how much money may be saved.

Cons

It May Not Be the Right Time

Timing is everything in the finance world. The goal for everyone should be to buy when the prices are low and sell when the prices are high. Unfortunately, this simple statement is harder to execute in reality. Car loan interest rates change based on the prime rate and the different markets that impact the automobile industry. If this is a car purchased recently, car loan rates may not have had a noticeable decrease. Of course, each individual must also consider their financial situation. It may not be the best investment of time or money at the moment to refinance a car.

There Could Be Fees

Make sure to consider fees before refinancing a car. These fees may include a current automobile loan having a prepayment penalty. Prepayment penalties are a practice that is unique to car loans and banned from student loans. In this case, the borrower pays the original lender when the new lender pays off the debt. Read the contract for hidden fees and assess whether it is worth it. Another example is processing fees, which can occur when one refinances a loan.

The ultimate factor in refinancing a loan is the credit score of the borrower. If the individual’s credit score has improved a lot, then it is a fantastic idea to refinance because it almost guarantees a lower interest rate. However, if the individual’s credit score has gotten worse, then it’s not a good time to refinance a car loan. One positive thing is that timely and consistent payments are often a great way to boost one’s credit score.

Hopefully, this discussion of the pros and cons of refinancing a car can help people make the best financial choice for their situation. It is not always a clearly defined choice, and being financially well-informed is the best way to guarantee financial savings.

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