Refinancing your auto loan can seem tempting when you’re running out of money or locating a better interest rate. Before making this decision, it is important to thoroughly understand the pros and cons.
Based on this information, we are confident that you will be able to make the best choice depending on your situation.
Refinancing your car can be useful in some situations:
- If you need to save now, either to free up money for an emergency expense or for a sudden drop in income
- If you have improved your credit score since the first time you took out a car loan, you may have access to better interest rates.
Lower your interest rate
One of the main reasons to refinance your auto loan is if there is an opportunity to reduce the interest rate. If your credit score has improved enough from your previous score, it’s worth checking to refinance your auto loan after a couple of years to see if you get better offers. You may have the opportunity to benefit from lower interests. “With a lower interest rate, you will be able to pay off your loan faster or reduce your monthly payment by paying it at the same rate.” Either way, you would pay less over the life of the loan.
Reduce your monthly payment
Things happen in life. Costly events such as unforeseen medical bills, having a baby or a natural disaster can create a situation where monthly expenses need to be reduced. Refinancing could allow you to extend the duration of your loan, thus lowering your monthly payments. For example, if you owe an extra year or two on your current loan, there may be an option to refinance and extend the term up to four years. This would result in a substantial reduction in all monthly payments, depending on the interest rate you get. While you will pay for multiple years, you would also be able to free up cash on a monthly basis. However, it is important to keep in mind that this would also mean that you would pay more interest over the life of the loan.
Improve your cash flow
“If you currently owe less than your vehicle is worth, you may be able to access more cash through refinancing. For example, let’s say you have owned your vehicle for three years. Your vehicle is currently worth $ 8,000 and you still owe $ 5,000 on your auto loan. You need money for a small home improvement project. One option would be to refinance your vehicle for $ 6,500. You will still owe less than the vehicle is worth and have $ 1,500 of new cash available to spend after the new loan has repaid your previous $ 5,000 balance.
It is important to note that a car is a depreciating asset that loses value over time. It can lose 10 percent of its value within the first month of ownership and over 20 percent within the first year. You never want to risk having to pay your car more than it’s worth.
Understanding the costs of refinancing
“Sometimes you can refinance with a lower interest rate, but because the loan is extended, you will actually pay more over the life of the loan.” It is important to use a loan calculator to ensure that you are saving money overall. Things can be deceiving when you see a lower monthly rate, so you’ll want to do the math.
For example, if you have a $ 5,000 loan with a 10% interest rate paid over two years, you will pay $ 5,537 in total. However, the same loan extended for five years will end up costing you $ 6,374. That’s $ 837 that could have been spent on something else. So, make sure you only extend your loan if necessary.
Sometimes the only reason to refinance your car loan is to quickly free up the money you need. Beware of higher interest rates! Most lenders end up charging higher rates on older cars.
Additionally, most banks will not charge an application fee for refinancing an auto loan.
If you are having a hard time getting finance because of your credit score (and haven’t had a chance to work long enough on your credit repair plan), why not consider giving us here at self-loan.ca a call?
We take into consideration every single question we get and don’t discriminate based on your current score, so you really have nothing to lose by calling us and seeing if there is anything we can come up with to help you with your current situation.