The Pros And Cons Of Refinancing A Car
Buying a car is never cheap, whether you shop around for a new model or prefer to pick up something secondhand, it’s still always a significant purchase. For that reason, many of us use a car loan, which enables us to shop outside of our cash-only budget, and also gives the option of leaving money in the bank, rather than shelling out too much of our savings. As the years roll on, though, financial circumstances often change, which is why so many look to refinance that original car loan to find more favorable terms.
Doing so is not a decision that should be rushed into. Instead, it’s important to first consider the pros and cons of refinancing a car loan. Here’s everything you need to know.
This article highlights a number of pros and cons to refinancing a car loan, based on extensive research and consultation with knowledgeable professionals. CarBuzz always recommends the use of a financial consultant when making decisions about your car loan.
The Basics Of Refinancing A Car Loan
Whenever you take out a car loan, the terms will be fixed and explained within your contract. Those terms will consist of the loan length, interest rate, and monthly payment. Typically, car loans on average are between two and seven years. A lot can change over such a period of time, including your financial situation, which is why many look to refinance.
Refinancing is when you approach a new lender to buy you out of your current loan, to then replace it with a loan from themselves. This way, you can take out a new loan with a new total amount borrowed, a new loan length, a new interest rate, and therefore a new monthly payment. Effectively, it allows you to rewrite the contract of your loan, to suit your current financial circumstances. People will often do this to get better deals (with lower interest rates) or to extend the remaining period to get lower installments. But is it always worthwhile?
The Pros Of Refinancing A Car
The pros and cons of refinancing a car are fairly simple and straightforward, so figuring out whether it’s a smart move for yourself or not is usually quite easy. Here are three benefits or refinancing a car:
Better Interest Rates
One of the main benefits of refinancing a car is securing a better interest rate, because it means you can lower your repayment without having to prolong the overall term, or without having to pay a lump sum, for example. This means you’re paying less in the long run. Furthermore, a larger chunk of the payment actually goes off of the total amount borrowed, rather than lining the financeers pocket with interest.
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Add Or Remove A Co-Signer
Co-signing a financial agreement of any sort is not something to be entered into light-heartedly, as removing yourself or others from such an agreement usually means having to refinance. So, if you need to either remove someone – or add a new person – refinancing is a no-brainer. Adding someone onto the deal with a great credit score to bolster yours will usually result in better rates, and therefore more affordable payments.
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Adjusting The Term
Looking to lower your payments but can’t secure a better rate? Extending the term can have the same effect, as spreading the balance to pay out over a longer term will naturally make the payments smaller. You’ll more than likely pay more in interest over the long run, but if monthly affordability is what matters most to you, then this is a great way to improve your situation.
The Cons Of Refinancing A Car
As with anything in life however, there are downsides too, which warrant careful thought. Here are two reasons which might make you rethink your decision:
Additional Fees
Finance companies often include early repayment or early closure fees within the agreement, which means refinancing could actually cost you a fair chunk of change to do. Not all lenders do this, and those that do will have different fees, so make sure you’re clued-up before signing any agreement when buying or refinancing a car.
Negative Equity
Ever heard the expression of being ‘upside-down’? In this sense, it means you owe more on the car than what it’s worth, which can make refinancing difficult. Refinancing to extend the term could result in extra interest charges, leading to you, the lender, winding up in negative equity. Refinancing to take equity out of the loan can also have this effect.
When Does Refinancing A Car Make Sense?
If you are in a good financial position, with plenty of positive equity in your current deal, it might be the perfect time to refinance. It’s important that you run the numbers to make sure additional fees and charges from your current and/or new provider aren’t nullifying the benefit of a refinancing deal with extra costs. If you’ve checked the fees from both lenders (or both deals), and are happy that the deal offered still has the desired effect, then refinancing your car could be a smart move to make.
If your credit score has improved since you first financed the car, then the chances are lenders will look more favorably upon you, and therefore offer better rates. In this scenario, refinancing is a great decision, as it can save you a considerable amount per month, without extending the term.
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When Shouldn’t I Consider Car Loan Refinancing?
If you’re in negative equity, have a bad credit score, or your car is older than 10 years old, you’re likely to struggle to find refinancing options. Often credit lenders won’t be willing to provide a refinancing deal, especially a competitive one, which means high interest rates are almost certainly a given – and this will result in increased monthly payments. Extra charges, such as early repayment fees, could be hidden in the T’s and C’s of your current contract.
If this is the case, and the new deal is only marginally better, then extra costs may negate the point anyway, in which case it’s best to hold fire. If you’ve only recently purchased the vehicle, say within the last six months or so, the chances of finding a better deal are slim to none. Build up a solid payment history with the current loan, increase your equity, and let your credit score stabilize before seeking out a new deal. If you can’t afford to pay your car loan at all, you’ll have to explore some other options: here’s a useful guide on how to do that.
Sources: Variety, Bankrate, NerdWallet
