A car is a significant financial purchase, and even more so when you have invested in it using an auto loan. While paying off the debt, a lot of people consider refinancing their car loan. For those wondering what that is, refinancing a car loan is basically switching to a new lender to clear the balance of your existing auto loan. Typically, borrowers refinance their car loan to land low-interest loans and cut down on the monthly installments. However, refinancing is also a viable option for those looking for a breather, that is, for an extended repayment period and lower monthly payments.
It might seem like a good idea, but there are several things to be considered before refinancing a car loan. There are reasons demonstrating when it makes senses to switch to a new lender:
Interest rates are dropping
Plummeting interest rates can be a good opportunity to refinance your car loan. This can be especially useful if you have applied for an auto loan via a dealership. Dealerships often don’t offer the best interest rates for car loans. Moreover, the negotiation window with them can be a bit tight. An interest rate slashed by even 2% or 3% can help you save thousands of dollars.
Your financial situation is getting better
While deciding the rate of interest, lenders take into account various factors, prominently, the credit score of the borrower. If your credit score was mediocre when the loan was originally approved, you might be struggling with high interest rates. If your credit score and debt-to-income have improved over time, it would be smarter to switch to a lender who can freshly assess your finances and offer a better deal.
You didn’t get to look around for options the first time
It would be judicious to look for car refinancing offers if you have not been able to secure the best deal the first time. For example, you might realize that the auto dealer stuck you with a 6.5% interest rate, while the other lenders were rendering reasonably lower rates. Dealerships generally do this to make extra money, so even if your credit score hasn’t improved or the interest rates haven’t dropped, it is worth a shot to shop around and consider the alternatives.
However, refinancing your car loan is not ideal if you have already paid off a major chunk of your original debt. Likewise, if your car is old, most lenders will refuse to refinance because the depreciation rate of cars is comparatively higher. Financial institutions typically don’t refinance cars that have been used for more than seven years.
There are several fees to be considered as well. For instance, a penalty has to be paid if you plan to pay off the car loan earlier than the stipulated period. Similarly, there are some refinance costs involved like lien holder and re-registration fees. The good part, though, is that they are not that expensive. Finally, refinancing could negatively influence your overall credit score. It would be wise to hold off on refinancing and stick to the original lender if you intend to apply for a credit card or personal loan in the future.
