Does car loan refinancing really make sense?

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If you purchased your car a few years ago when your credit score wasn’t all that impressive, chances are high that you might have gotten a raw deal in terms of the interest rate offered on the car loan. You can get a much better deal today if your credit score has improved considerably since then. For instance, if you’ve moved from fair credit (630 – 689) to excellent credit (720 and upwards) category, you will want to read on. Just like refinancing a home loan can lower your monthly outgo and help you save a good amount of money, the same can be achieved by opting for car loan refinancing.

car loan refinancing

Keep in mind that while sometimes it’s a good idea to refinance a car loan, there may be times and situations when doing so may not actually make a lot of sense.

Car loan refinancing – when is the best time?

Let’s explore the circumstances when getting your car loan refinanced may be a good idea.

Interest rates have come down

It could be that interest rates have come down significantly since the time you purchased your car. As a result, you may save a lot of money if you get your car refinanced at a lower rate today.

Your credit score has gotten a lot better since the time you took out your car loan

As also mentioned above, the chances are high that you may get a considerably lower interest rate today if your credit score has improved significantly since the time you took out your used or new car loan. Hence opting for car loan refinancing may save you plenty of money. For instance, people pay as high as 12.22% interest on their auto loans if they fail to get their cars financed from dealers. This is likely because of their low credit scores. If your credit score has improved considerably, you may be able to get a more reasonable interest rate today.

You wish to lower your monthly payments in order to avoid default

If you’re having a hard time repaying your car loan and are worried about a possible default in the future, refinancing your car loan with a long-term or a lower interest rate can provide you some breathing space. However, please keep in mind that extending the car loan to a longer time period may automatically cost you more in the long run. It’ll come down to a trade-off between a possible default and an expensive loan.

When you should stay away from car loan refinancing

Although getting your car loan refinanced may appear to be a very sensible decision in the situations detailed above, it doesn’t mean that it’ll always be a risk-free arrangement. The decision may backfire. There could be potential disadvantages in the arrangement. You should keep the following points or potential disadvantages in mind before acting in haste:

You may have to pay prepayment penalties

Although there is no prepayment penalty involved in a large majority of car loans these days, it doesn’t mean that yours will not have it as well. Go through your car loan documents and ensure that you won’t be asked to cough up any prepayment fee for closing your loan before time. If that does apply to your situation, factor in that cost into your final decision. For example, if there is a prepayment penalty of $500 involved in your present car loan, you shouldn’t refinance unless you’ll end up saving at least $500 by making the switch. It may prove to be an expensive deal otherwise.

Extending your repayment time period may leave you longer in an ‘upside down’ position

Extending your car loan repayment period could result in a situation where you’d be building equity at a rate slower than which your car will depreciate in value. It’s possible that you’d owe more on your car than its actual worth. This is known as an ‘upside down’ situation in the context of loans. It is important to be aware of the time period in this case.

Extending your car loan’s tenure may increase your total outgo on the loan

Although your decreased car loan payments may positively impact your monthly cash flow, it doesn’t mean that you’ll be saving more in the long run. Refinancing a car loan and extending its repayment time period can eventually make you pay a lot more for your car than what you’d have actually paid had you continued with the original repayment plan.

There may be additional costs

Please keep in mind that car loan refinancing facility doesn’t always come for free. Although you may not incur any additional charges most of the times, there may be situations when you’d need to pay additional charges or fees depending on the lender. Hence, it’s always better to inquire about such charges before putting your pen to paper.

Final Thoughts

Refinancing is an option you can consider if your car loan arrangement doesn’t fall in line with your current lifestyle. However, you must keep in mind that it may or may not leave you better off.

The best way to benefit from car loan refinancing is by opting for a new cheaper loan with a shorter or equal repayment timeline. By doing so you’ll decrease your monthly car loan payments without extending the loan’s tenure.

Refinancing a car loan may prove to be a good move in some situations. Ensure that you’ve gone through the numbers. Before agreeing to a new loan arrangement, consider the long-term and short-term impact on your financial goals. This may also be the right time to ask yourself why do need to borrow money in the first place. If it’s only basic transportation you are after, it may be more sensible to buy a used car with cash.

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