The best way of managing the cost of your car loan is auto refinancing. Today, we will explain what auto refinancing is and when you should opt for it.
Auto refinancing is the process of taking another car loan to replace an existing one. The result of refinancing is a fresh loan contract, usually with another lender that allows you to take advantage of different terms. In several cases, people choose to refinance their cars to improve their cash flow as facilitated by lower interest payments.
Here are cases that may result after auto refinancing:
- Lower monthly payments – Refinancing reduces the monthly payment owing to a lower interest rate on your car loan. However, the term of the loan may increase in such cases.
- Lower interest rate – A reduced interest rate may allow you to pay less overall interest when you decide to refinance your car loan. This will only make sense if the old interest rate is higher than the new one.
- Longer loan term – Increasing the duration of the loan will reduce the individual payment amount you make each month but will result in a higher interest rate. This is useful for people who don’t have a lot of disposable income at hand.
- Shorter loan term – On the other hand, shortening the duration of the loan will increase the payment amount but lead to lower interest rates.
When refinancing makes sense
Refinancing may be of particular interest when any of the following apply:
- Improved credit score – If your credit score has improved since the last time you took out the car loan, it may be worth auto refinancing.
- Interest rates have fallen – Even a reduction of a few percentage points can lead to significant savings.
- Your original deal was not good enough – Sometimes, lack of knowledge may lead to you agreeing to a less than favorable car loan agreement. In such cases, refinancing makes a lot of sense.
- Change in your financial conditions – A change in your income may require you to go for lower interest payments, whereas you might be able to pay off car loans quicker by making more money.
Regardless of the situation you are in, always make use of a refinance calculator to get a better picture of whether refinancing works for you or not. There are various online calculators that will help you in your search for favorable car loan terms through refinancing.