Refinancing a car loan is the process of taking out another loan to pay off your existing car loan. Today we discuss the situations where you should and should not go for car refinance.
When to refinance car loans?
Here are some of the situations that make refinancing a car loan a good idea.
Decrease in Interest Rates
The fact that interest rates fluctuate means that there is a chance of them decreasing since the time you took out the auto loan. A minor drop of two to three percentages can provide substantial savings over the term of your loan.
Did Not Get the Best Offer the First Time
Sometimes the offer you took was not the best you could manage. The interest rates or your financial situation may be almost the same. However, the lender charged a higher rate of interest than what other lenders were offering. In such cases, it is best to refinance a car loan.
This could mainly be the case if the first loan you obtained were from a car dealer since they are notorious for making more money off higher interest rates.
Having Troubles Keeping Up with Loan Repayment
Sometimes, you have cash problems that make refinancing a car loan a sensible option even if you cannot get a lower rate of interest on the loan. It ensures you do not miss out on any loan repayments by reducing monthly payment amount.
If you cannot secure another car loan, it is reasonable to talk to your current lender to renegotiate the loan repayment term on your auto loan. Bear in mind that a longer term means that you will be paying more interest over the life of the loan.
When not to go for car refinancing?
Although refinancing can help save money or improve cash flow, in some cases, it is not the wisest option. If you encounter the following scenarios, it is best to hold off on refinancing.
Most of the Loan Is Repaid
Interest payments are primarily at the beginning of the loan term. This means that most of the interest is paid in the loan’s early years. The later you refinance your loan, the less money you end up saving from refinancing.
Refinancing Fees Are Too Much
Sometimes, fees such as prepayment penalties and loan conversion outweigh the benefit you will receive from refinancing a car loan. In such cases, it is better to stick to your current loan agreement.