The cost of keeping your vehicle on the road each month is a challenge for many. As Experian noted, drivers saw an increase in monthly payments last year – an average monthly payment of $ 417 for used vehicles and $ 644 for new ones.
You can refinance your vehicle loan – this happens when you apply for a new loan to replace the current one. Refinancing is a great option if your circumstances have changed and you want to save money on your monthly payments. But this decision does not come without risk, refinancing can raise interest rates and possibly cause you to reverse your loan.
Benefits of refinancing your car
The benefits of refinancing Your current car loan ends up saving you money. Keep these in mind when determining if refinancing is right for you.
Lower monthly payments
If you have difficulty meeting your monthly payments, refinancing can reduce your costs and free up some extra cash each month. You can do this by getting a lower interest rate, long term or both. But while signing on to one long term means you can save money on a monthly basis, it also means higher overall cost over the life of the loan.
Repay your loan early
On the other hand, refinancing can also lead to early repayment of your loan. If you’ve had a positive income change since you first signed up for your loan, this may be the time to refinance in less time. Early repayment of your loan will also reduce the total interest paid – saving you more money. To get the most out of your refinancing, confirm with your current lender that there are no prepayment penalties.
Lower interest rates
Your interest rates make a dramatic difference in the amount of money you have to pay each month. This number is based on various factors, but is mainly influenced by your credit score. So, if your credit has improved since you received your loan, it may be a great time to explore refinancing options. You will probably receive more favorable terms and prices.
Disadvantages of refinancing your car
Pressing the refinancing button of your loan through refinancing is not without risks. Consider these disadvantages.
If you are in a difficult financial situation, keep in mind that refinancing your loan comes with some additional charges. These costs may include application fees, prepayment, title transfer and origin fees. Because commissions can add up, be sure to fully calculate how much refinancing will cost you and how the interest rate and duration compare to your current loan.
It can be done upside down
Being upside down on your loan means that the amount your car is worth is lower than the amount you have left to pay on the loan. It is also known as a submarine. If you refinance and extend the term of your loan, you are more likely to find yourself in a situation where you owe more than the value of your vehicle.
High interest rates
Refinancing is also accompanied by the risk of higher interest rates. If your credit score has dropped or interest rates have risen, you may end up with an interest rate higher than your current one. Buy a variety of options to do your best to avoid high interest rates.
How to determine if refinancing your car is a good idea
The key to determining if refinancing your loan is a good idea depending on the amount of money you can potentially save. Weigh the pros and cons by taking advantage of one automatic refinance calculator. Some cases where refinancing may make sense include:
- Your credit has improved. If your credit score has improved since the initial approval of your loan, you can probably get more favorable terms and interest rates through refinancing.
- You jumped for funding from agents. Usually, the terms offered through dealerships are not the best available. Explore other lending options if you already have dealership financing.
- You can not make payments. Lack of payment can lead to charges, bad credit, or worse, vehicle recovery. If you can not make payments, refinancing may allow for a lower monthly payment.
Before refinancing, determine if you will save real money or if you are just late in repaying your loan. If you are having financial difficulties, there are still alternatives to be considered. But if refinancing is the right choice for you, see the winner of Bankrate for the best choice of auto lender.