Refinancing Your Car Loan: Advantages vs. Disadvantages

Posted by Cory Lowe - 15 November, 2013

The choice to refinance your car loan can be beneficial to your immediate expenses, but you should understand both the advantages and risks before starting the process. Snap decisions about your finances are never a good idea, so consider all facts on car loan refinancing ahead of time. Auto Refinancing

Benefit: Lower Interest Rate

You can potentially lower the interest rate on your car loan by refinancing. The interest rate you got for your original loan was most likely based on your credit rating, and if you have improved your credit rating since getting the loan you should investigate refinancing seriously. Even an interest rate deduction of one or two percent can save you a substantial amount of money over the course of your car loan. Check your credit report, compare your current rating against what it was when your car loan was approved, and ask for new interest rate qualifications from the refinancing offers you are browsing.
It is also possible that, at the time you got your loan, interest rates were high for everyone across the board. An idea of trends in average interest rates from creditors will let you know when the best time to refinance arrives. When average rates drop, it is time to look at your loan terms.

Risk: Longer Term

While refinancing, restructuring the car loan into a longer term can be tempting. An extended repayment term reduces the monthly payments on your used car, but not how much you will inevitably pay for the car. Every month added onto your loan term is another month of interest you need to pay on top of the loan’s principle. This strategy only makes sense if the monthly payments for the shorter loan are unmanageable.

Risk: Reduced Collateral

Cars depreciate in value quickly. The car you are working on paying off is the collateral for your loan and its current fair market value will impact refinancing options. If your car is five years old it is only worth a fraction of what it originally cost and lenders will use that reduced value as the loan’s collateral. In the event of a loan default and repossession, the lenders will only recoup whatever the car is currently worth, so trying to refinance a loan for an older vehicle will be more difficult. Since cars depreciate so quickly, car owners are also at risk of getting into an upside down car loan where they owe more on their loan than their car is actually worth.

Refinancing a car loan can save you money and expedite when you will be finished paying off your loan. Avoid the risks and take advantage of car loan refinancing benefits by understanding how your loan is currently working and how you can make it better.

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Topics: Car Financing

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