Refinanced Car Loans: How Do They Work?
Let’s face it - finances are tricky. There are loans, refinancing loans, interest rates and fees to worry about. All of these various elements contribute to a wild juggling act for a borrower whose only want is to save money and get by. Most of us have taken out a loan to purchase a new car, and you’ve probably heard of refinancing a car loan. Refinancing a car loan means: take out a new loan to pay off the balance of your existing car loan. Does this make sense? Are there benefits in taking this financial approach?
Yes, there are benefits, which is why borrowers take this avenue of refinancing loans on their vehicles. The main attraction in refinancing is to achieve a lower interest rate. This helps the borrower save money in the budget. If the borrower can’t find another loan to refinance their existing car loan that offers a lower interest rate, they may be able to find one that has one with a longer repayment period that in turn, reduces the monthly cost. While this longer repayment loan could help with short-term budgeting, it may increase the total interest cost over the loan’s lifetime.
When Refinancing Works for You
For some, it’s smart to refinance their car loan. If you decide it’s the right option, you could come out with the better loan and lower interest rate. Refinancing, even if doesn’t end up being the better option, doesn’t hurt to look into. It’s always an avenue to pursue if you’ve dramatically improved your credit score, are struggling with a tight budget, trying to get the best offer or are researching a lower interest rate than the one that was attached with your initial loan.
You Initially Missed Out on the Best Offer
The best offer can mean a lot of things for refinancing a car loan. For one, you could extend your loan, and this means lower monthly payments. Depending on your situation, this is an excellent advantage. If you’re growing your family and just had a baby, have unexpected medical bills or if you and your family have suffered through an emergency of natural disaster.
The best offer could also mean being able to switch lenders. Again, depending on your relationship with your lender, this could be an advantage. Perhaps the first time around, you were stuck with a lender that’s tough to deal with, get a hold of, or isn’t flexible with payments or has the best rates.
For a lot of borrowers refinancing their car loan, the best offer means being able to switch lenders who were offering better loan rates at the time, and for whatever reason, weren’t able to go with them when they initially signed their loan. With refinancing, now’s the time to make that switch, finally getting the relationship and interest loan they had wanted.
Interest Rates Dipped Since Your Last Loan
Interest rates change all the time. There’s a good chance that they’ve dropped since the time you took out your original car loan. If you think that a couple percentage points don’t make a difference - you’d be wrong. Even a drop of 2% or 3% could mean a hefty savings for you as the borrower, which translates into a nice, padded savings account over the lifespan of your loan.
Refinancing is a big decision, but when a lower interest rate is on the line, it’s definitely worth considering. A lowered interest rate will also depend on a number of individual factors as well, one of the main ones being an upstanding credit score. If that’s something you have, or have been working on, then seeking out refinancing could be the right option for you.
You’ve Worked on Your Financial Situation—And It’s Improved
Lenders will examine a number of factors to determine the characteristics of your auto loan. This includes your credit score, your debt-to-income (DTI) ratio, credit reports and closely examining any hiccups that may have come up in your credit history. It’s never a bad plan to work on your credit health, even if you’ve already sought out your car loan.
For refinancing, lenders will reexamine your credit standing. If you’ve been hard at work on your credit score and practicing healthy financial habits, then refinancing could get you a lower interest rate after all.
You’re Struggling with Your Financial Situation
Alternatively, if your budget has got you living paycheck-to-paycheck, refinancing your car loan could be a viable option to loosen up some cash flow. For you, this means a longer repayment period to reduce your monthly payments. Be careful in extending your loan because the longer you spend repaying it back, the more you’re spending on the loan’s interest.
When Refinancing Your Car Loan Doesn’t Make Sense in Your Situation
Refinancing doesn’t make sense for everyone. There are times when it’s better to stick with your original car loan instead of seeking out refinancing.
Your Original Loan is Nearly Paid Off
For most loans, you pay most of the interest in the beginning. If you’re at the tail end of your original loan, then it means you probably aren’t paying as much interest as you were when you first began. Therefore, interest isn’t really a determining factor for you to seriously consider refinancing your car loan. You’ll likely save more by paying off the original car loan.
You Have an Older Car with Significant Mileage
If you think that it seems as if your car depreciated the second it rolled off the lot, you’re correct. Cars depreciate quickly, and refinancing is a ticking clock. You can only really refinance your car within the first few years of owning it for this avenue to be effective. Generally speaking, lenders avoid issuing refinanced car loans on vehicles that are older than seven years or cars that have more than 75,000 miles on them.
When the Fees Are Too Overwhelming
Some lenders equip their refinanced car loans with so many fees that it doesn’t make sense to pursue this method of financing. There are prepayment penalties to consider, which means you can be penalized for paying off your original loan earlier than you intended with your refinanced loan.
There are also loans with precomputed interest. These loans make the borrower pay off the interest in its entirety as well as the principal of the loan. Refinancing fees are also something to watch out for with refinancing a car loan. They’re not horrendously expensive, but things like lien holder and state re-registration fees can add on to your expenses.
While you should also consider the disadvantages of refinancing, there are still plenty of perks that come with refinancing a car loan. Keep in mind that refinancing could have the potential of negatively impacting your credit score, but it could also save you money if you find the right lender.
Refinancing means that as the borrower, you could tackle the principle of your loan faster than with your original loan. With a hopefully lowered interest rate, you wouldn’t accumulate as much interest and instead, focus on being allowed to pay off the actual loan’s principle. This means savings for you, both short-term and long-term. You can seek out a refinanced car loan from any potential lender.