Should You Refinance Your Car?
With the great economic downturn, millions of families have had to find ways to cut their expenses in order to live on less income.
But only few think of reducing their monthly car payments by refinancing their car loan.
Refinancing your car can save you thousands of dollars. It is a great way to get out of a high-interest auto loan and boost your credit.
The asset, that is your car, does not need to be appraised in order to be eligible for refinancing. There are, however, some factors to consider before refinancing your car.
Better Credit
The best time to refinance your car is when you have earned a higher credit score. That means you should strive to make timely payments even if your current loan is quite a burden.
But what if you still have an unimpressive credit? Is it still possible to refinance your car?
Debt advisers say that lenders usually accept medium credit for auto loan refinancing programs. If you still have bad credit, refinancing might not be the best way to cut your car expenses.
Refinancing your car loan with bad credit only to get a high interest rate again does not make sense. Work on your credit now so you can successfully refinance your car loan in the future.
Lower Interest Rate
One of the main reasons why you will refinance your car loan is because you want to get a lower annual percentage rate or APR and save money in the process. Therefore, do not refinance if you will not be able to get approved for a lower rate.
The lender, however, might allow you to extend the loan term to lower your monthly payment. But this is far from ideal. You will just pay more for your car over time.
If you are planning on refinancing your car in the future, start monitoring the interest rates now. Bankrate.com is a good source for that.
Extended Repayment Period
Refinancing does not make sense when you will only have to extend the term. Opting for a longer loan term does lower monthly payments, but not really the total cost of the loan.
Keep in mind that cars are depreciating assets. Extending the loan term would only put you at high risk of being upside down on your auto loan.
Here’s what experts have to say: If there are only 2 years left on your current loan, forget about refinancing and finish it instead. The only time it might make sense in this case is if you have serious cash flow issue.
Prepayment Penalty
Did you ever bother checking whether the loan agreement you signed has a prepayment penalty clause?
The prepayment penalty is charged when you complete your payments on the loan ahead of the schedule. There can be more than a couple of reasons why some lenders do this. But one of them is to secure the profit they make from the interest you pay.
In any case, it might not be so smart to refinance your car loan if your current lender will demand payment for an early payoff. The penalty can be a hefty amount and forfeit your purpose for refinancing your loan.
Before anything else, talk to your lender about you plan. You have to let the company know so they can also assist you with the paperwork and your transition to the new loan.
Tips for a Successful Auto Refinance Application
Here are some pointers to keep in mind when seeking approval for car refinancing:
