Did you recently finance your dream vehicle and get yourself into financial shackles shortly after? It’s common for people to experience monetary pitfalls, especially when they pursue serious decisions, such as purchasing a car, with poor planning.
However, there’s a greater chance there may be factors involved beyond your reach. Hence, if you’re falling short of payments every month and find yourself in a tricky situation with your current lender, now may be the best time to speak about the elephant in the room: auto refinancing.
What Is Auto Refinance, And Why Do You Need It?
You’re probably already familiar with the advantages of a mortgage refinance, but what if we were to tell you that the same was also possible for a vehicle?
Did you know that reducing your monthly payments and securing a lower interest rate is still possible after financing your vehicle?
We refer to this phenomenon as “auto refinance,” and here’s what it entails:
You apply for a new loan, which should pay off your existing loan. As a result, you can get a brand new loan agreement with new loan terms and also a new interest rate. Now, you may be wondering, if auto refinancing really is a piece of cake, why don’t more people opt for it?
It all essentially comes down to the following question:
Is your existing loan taking a toll on your pocket? If it is, it’s only reasonable to acknowledge there may be lenders out there better suited to our needs. Instead of getting ourselves in debt, we may as well find an alternative that doesn’t dig a hole in our pockets.
Hence, the next question to ponder upon is, what do you need to consider before applying for an auto refinance?
All the Factors to Consider Before Applying For A Car Refinance
How Much Time Do You Have Remaining On Your Loan?
It’s important to determine how much time you have remaining on your current loan before considering an auto refinance. Refinancing too late into the term may not have as many benefits as you’ll already have paid most of the amount in interest.
Refinancing too early into the term could cause trouble finding a new lender since most of them have their own unique requirements when it comes to approving applications.
Is Extending the Loan Terms an Answer?
Most people assume that the only way to land lower monthly payments is by extending the loan terms. While it is definitely a way out of your financial turmoil, for the time being, it may not necessarily prove to be a solution for the long term.
This is because even if your monthly payments get low, you may end up paying more in interest in the long run. Hence, the best way out is to refinance to get a lower interest rate at a shorter or the same term as you have now.
Has Your Credit Score Improved Recently?
One of the chief factors that determine your terms and interest rate is, nonetheless, your credit score. Lenders often carry out inquiries to figure out whether you’re capable of making payments on time, and a decent score is a representative of who you are as a borrower.
Hence, if your credit score hasn’t improved since you took out the first loan, then you may want to wait slightly longer before going down the car refinancing road.
Are There Any Prepayment Penalties Involved?
If your lender has subjected you to prepayment penalties, then you may want to do the math before making a leap. Consider how much you will be able to save; and if that amount is greater than the penalty, refinancing may be a good idea.
What Are the Refinancing Requirements?
Every lender has its own set of requirements, which is why it’s important to become familiar with them before making the final decision. For example, some lenders place a restriction on how old the car can be or how many miles it should have before they can consider approving the application.
Is Your Income Steady?
Again, it’s understandable why you may have considered auto refinance in the first place. Whether it is a personal choice or a financial turmoil that has landed you in this position, refinancing can get you out of a pickle.
However, at the same time, your new lender may also be concerned if your income has dipped to an all-time low. Hence, make sure to think it through and speak to your lender thoroughly before opting for a car refinance.
Final Thoughts
Refinancing a car loan can help you in tons of ways. For one, it can help you save money by lowering your monthly payments. Moreover, you can also enjoy a lower interest rate, given that you’ve done your research well and landed just the right deal for yourself. However, at the same time, it’s also important to note that refinancing may not always be a smart choice. Lower monthly payments at the cost of an extended term do not mean your new deal is better than the existing one.
It can also mean there’s more money slipping out of your pocket over the life of the loan. In the end, the only way to figure out whether or not to refinance an auto loan is to determine whether your current circumstances require it. Hence, make sure to look around and compare the rates being offered by different lenders before you settle for one.