Is Refinancing Your Auto Loan a Good Idea?
As many car owners will tell you, ownership can be quite costly. Apart from regular repairs and maintenance, gas, and parking, accidents could also cause you to spend more money than you had expected.
While auto insurance can help you deal with some of these expenses, it won’t help you pay for all the costs associated with car ownership. And if you had taken out a loan to help you pay for your car, you could find the monthly payments becoming harder to manage over time.
But there may be some relief in the form of auto loan refinancing. If you have improved your credit rating since you purchased your automobile, you may be eligible for a refinancing plan that allows you to make lower monthly payments.
What is auto loan refinancing?
Refinancing an auto loan involves replacing your current loan with another one, typically from a different lending company. The new lender pays off your previous loan and receives monthly payments from you. These new payments are for smaller amounts than those from your earlier loan, which is the primary benefit of refinancing.
Refinancing is a feasible option for car owners that have improved their credit standings since purchasing their car. Doing so allows them to enjoy lower monthly payments with reduced interest rates.
Depending on the terms of the new loan, you may even get a shorter payment period. Alternatively, you can extend the loan period to reduce the amount you have to pay each month.
The downside of refinancing
Like all loans, there are downsides to refinancing. But these are mostly negligible compared to the drawbacks with other loans.
For starters, you can probably expect your credit score to go down slightly when you apply for the loan. It could also take a while before you get approval. But apart from these concerns, there aren’t really any major downsides to auto loan refinancing.
Furthermore, you probably won’t have to shell out any cash initially, as auto loans typically don’t entail prepayment penalties. There are also no application fees, and you should have access to the funds quickly after being approved.
Why should you consider refinancing?
The most obvious reasons to refinance your loan are to lower your interest rates and reduce your monthly payments. If your current loan comes with a 10% interest and you’ve been paying it off for about a year, your credit score has probably improved enough for you to be eligible for refinancing.
Why not just get your loan refinanced by your original lender? Most lenders will not be willing to lower your current rates, especially since you’ve entered into a contract with the firm. Therefore, your best option would be to go to another company that will be willing to pay off your existing loan.
The good news is that many lenders are eager for new business given the highly competitive nature of the industry. And since you will be making smaller monthly payments on your car, you could free up more funds for other uses. Alternatively, you could also arrange for a shorter payment period, which will allow you to pay off your loan much sooner.
When is refinancing a good idea?
Refinancing isn’t necessarily the best course of action for every given situation. If interest rates have remained the same since you got your current loan, it might be best to stick with it for the time being. And if your credit rating hasn’t improved significantly since then, you may not even be able to get refinancing at all.
Refinancing is a good idea if interest rates have fallen over the past couple of years. Whether it is due to changes in the economy, an increasingly competitive banking industry, or regulatory changes, lower interest rates are always nice to have.
Conversely, you may want to get refinancing if you were given a higher interest rate to begin with. This is often the case with first-time car buyers that don’t shop around for the best loans. If that is what happened to you, you could get a new loan that comes with lower interest rates.
Refinancing an auto loan can be a wise move, but knowing what you are getting into is important. Being aware of the risks will help you determine whether or not refinancing is a feasible option, so you could hopefully reap the most financial benefits from your decision.
About Daniels Insurance, Inc.
At Daniels Insurance, Inc., we have a unique understanding of the risks that businesses like yours face on a regular basis. With the backing of our comprehensive coverages and our dedication to customer service and quick claims resolution, your business will be fully protected. For more information, contact us today at (855) 565-7616.