Are you considering refinancing your car loan? You may have many potential reasons for doing so. You also might have numerous questions about the process and whether it’s a good idea. Be aware, there is no universal answer to the question “Should I refinance my car loan?” Whether this is the best decision in your circumstances will depend on a number of factors. The following are among the most noteworthy. Although you might not want to make a final decision about whether to refinance your car loan based solely on one short blog entry, the information here can at least hope you begin better understanding the pros and cons of this option. Factors that should influence your choice if you are thinking about refinancing a car loan include:
Many drivers who refinance their car loans do so in order to lower their interest rates. For example, when you first bought your car, your credit may have been poor or you might not have had credit at all.
Perhaps this has changed. You might now qualify for a lower interest rate than your current one if your credit has improved since the time you purchased your vehicle. Consistently making timely payments can also improve your chances of qualifying for a lower interest rate.
It’s worth noting that even seemingly minor reductions in interest rates can yield major savings over a loan’s lifetime. Don’t assume refinancing isn’t worth your time merely because you’ll only be able to lower your rates by 1%. That might be enough to make refinancing a smart move for your bank account.
Conducting thorough research when thinking about refinancing a car loan is essential. You need to be certain you understand various critical details about a loan that can affect how much money you will or won’t save as a result of refinancing.
Consider the fact that a lender may charge a high origination fee if you take out a new loan. Additionally, if a loan includes a prepayment penalty, paying off your loan early by refinancing to a shorter term could leave you incurring fees that might negate any savings you thought you were taking advantage of.
Lowering the monthly payments is another common reason for refinancing a car loan. If your budget has changed and you can no longer make the monthly payments you’re currently paying, or you wish to lower your monthly payments so you can pay off higher-rate debt, you might benefit from refinancing.
That said, if you’re trying to substantially lower your monthly payments, you might not be satisfied with the degree to which lowering the interest rate will lower your payments. To achieve a larger reduction in monthly car loan payments, you might need to extend the term of your loan.
In the short term, doing so can free up more money for you to devote to other expenses during any given month. However, in the long term, extending your loan’s term could result in you paying more in interest over time.
Your credit score
If you apply for a new car loan to refinance it is likely you will be subject to a hard credit inquiry. This will probably have a negative impact on your credit score. Opening a new loan account may also lower your credit score by lowering the average age of your accounts.
That said, the factor which will have the more substantial impact on your credit score is whether you make payments on time. Although no one ever wants to see their credit score go down, if you can confidently state that you will be able to make timely loan payments, offsetting the reduction in your credit score that might initially result from refinancing your car loan could be relatively easy.
Additionally, you could make smart use of various resources that help you set aside funds for car loan payments, such as a debit card that uses spare change from everyday transactions to chip away at car loan payments, to ensure you are less likely to miss a loan payment. This can be good for your credit score in the long run.
All that said, it’s important to remember you must consider various factors when deciding if refinancing your car loan is the best choice to make at this time. These are merely some of the most important factors that could influence such a decision. As always, do your research and consult with an expert if you have additional questions about the subject.