Refinancing a car loan can seem appealing, especially if the rates have recently gone down, but is it the right choice for you? While there’s always a possibility of landing a better deal from a different lender, it’s also imperative to take a closer look at your circumstances and determine whether you will benefit from it.
Auto refinancing has numerous pros and cons, but the best decision will ultimately rely on your situation.
The Possible Costs of Refinancing
Imagine you come across a deal with a lower interest rate than your existing loan. While you will most likely consider it ideal, that may not be the case.
A lower interest rate may not always be an effective option for your situation as it may be accompanied by an extended loan term. This means you will end up paying more over the life of the loan.
Hence, getting a lower monthly rate might be what you need right now, but if the goal is to pay less, we recommend doing the math.
When Does Refinancing a Car Loan Not Make Sense?
Auto refinancing can help you save up a significant amount of money, but it may not be the best option for you in the following circumstances.
If You’ve Almost Paid off Your Existing Loan Amount
In a nutshell, the longer you put off refinancing, the fewer benefits you will be able to reap from it. This is because interest is mostly front-loaded, which means you pay off a huge chunk of it right in the beginning.
Your Car Has a Lot of Miles on It
Refinancing your car within the first few years of owning it is the only way to land credible deals because cars tend to depreciate quickly. So, if your vehicle is over a certain age or limit for mileage, it may not be such a great idea to refinance. This is because most lenders will refuse to do so or end up charging you an insane amount of money.
The Benefits Are Falling Behind the Fees
Make sure to look out for any costs associated with auto refinancing. For instance, some loans come with prepayment penalties to discourage borrowers from paying the loan off earlier. In case of doing so, you may be liable to pay the additional interest along with the principal.
At the same time, you may also be likely to incur fees associated with refinancing, such as state re-registration and lienholder fees.
You Have Plans to Apply for More Credit in the Future
Auto refinancing often comes with a hard inquiry on your credit reports, which means it can impact your credit negatively. Hence, if you want to apply for a credit card or mortgage in the near future, you may want to hold off your plans for auto refinancing for a while and focus on keeping your scores as high as possible.
The Bottom Line
In the end, refinancing can be both a good and a bad idea, depending on your existing circumstances and future endeavors. Hence, you should seriously consider the pros and cons associated with it before taking the plunge.