How to refinance a car loan, you ask? At the start of the year, you might be one of those people that are looking for low interest rates in car loans.
For those planning to refinance, this basically means taking out another loan to pay off the remaining balance of your existing car loan. Most of the time, this will be secured by the purchased vehicle.
As for why you’ll want to do this, there are several reasons. Understanding when it’s a good idea to consider auto loan refinancing can be helpful when it comes to getting the best deal for your car.
The main reason why people refinance their car loans is to save money. By refinancing, they can move from paying a high-interest rate, to one that might offer a lower interest. For example, you might take out a car loan with an interest rate of 11%, and then find a lender who is willing to refinance the loan with an interest rate of 8%.
Even the small 2-3% difference in interest rates can lead to even more savings down the line.
Another reason to refinance your car loan is to also take advantage of lower repayments as a result of the lower rates and fees. You can even extend the loan term when you refinance, allowing you to lower these monthly payments even further. Of course, this is also an option if you’re planning to switch to a different lender with a better deal.
Maybe they offer more features than your original loan, such as the ability to pay off your loan early without any fees. These can all be valid reasons for changing lenders.
One other benefit of car refinancing is the ability to get some cash for your equity. Some lenders offer cash-out loans that not only allow you to refinance the loan, but also let you have some cash to pay for other expenses.
Of course, as with any financial decision, you need to go through this carefully. Think about your circumstances first: Will refinancing really lower your repayments?
Perhaps the lender may have lower interest rates but may have higher ongoing fees. Maybe extending the loan term will lower the monthly payments, but increase the amount of interest rate you pay for the life of the loan.
You also need to look for a legitimate lender. This can be a tad challenging, as there are multiple providers with their own set of features and deals. It's now up to you to sort out factors other than low interest rates, such as transparency when it comes to fees, and checking reviews for customer experience.
According to Experian, another way that refinancing could affect you is with your credit score. When you first apply for this new loan, the hard credit inquiry your new lender conducts could cause your credit score to temporarily dip by a couple of points.
Of course, this should rebound over time as you diligently pay for your loan. However, it is still important to keep these caveats in mind if you want to keep a stellar credit score.
Of course, refinancing your car loan isn’t always a good move. Sometimes, sticking with your current lender is still the best option. See examples below.
While it is commonly used to lower your monthly payments and interest rates, it can also help you take a break from ongoing monthly payments. Here are some common reasons for refinancing:
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