As time passes, you may get better car deals or simply feel the current auto loan isn’t favoring you and you opt for refinancing. Before you fully decide to refinance, you need to make an educated decision. The truth is, refinancing has its pros and cons, and you need to know them before you make the final step.
Benefits of Refinancing
The interest rate could be lower
One of the strongest reasons for refinancing if you get a lender offering a lower interest rate. Previously, you may have had poor or no credit. Usually, people with poor credit scores often get some pretty high-interest rates. If your credit score improves, the chances are that you can get a lender offering a lower interest rate. You can get options on how you can improve your credit score at Crediful here. Your credit score is the key to unlocking great deals.
As such, the deal of lower interest rates becomes enticing and could potentially be cheaper in the long run. This means reduced monthly payments and a shorter repayment period.
You can extend your loan term
Refinancing needs to be well-thought about before you finally sign the agreement. If you get a lender offering a cheaper interest rate, you have the potential to extend your loan term.
Be careful when choosing this option because even when you are paying less monthly, you may end up paying more than the original lender. You may end up extending your loan period, which explains the high expense.
Changing from variable to fixed rates and vice versa
Interest rates are what mainly determine if the auto loan you choose is worth it or not. Some lenders offer variable interest rates while others offer fixed rates or both. You may have initially chosen variable interest rates, and after some time due to market conditions, they rose and became insanely high. When you calculate you will end up paying a lot of money towards the loan.
Variable interest rates are only ideal when you can predict that they will go lower. However, some lenders will recommend them because they know they will ultimately go higher, which means more money for them.
Fixed rates are ideal in most scenarios because you are sure that they will remain constant until you fully repay the auto loan.
Refinancing a loan with a variable rate to a fixed one may end up being beneficial, and you may end up paying less than you’d have.
Shortening the loan term
Initially, your loan-term may have been 10 years. However, the reason you want to refinance could be because you want to reduce the repayment period to about 5 years.
Refinancing helps you adjust your repayment period. You may be received a salary increment or had a recent investment that’s bringing in substantial amounts of cash, and you feel the need to repay the loan faster.
Before refinancing, talk to your lender and let them know you want to repay the car loan in a shorter period. Then see if you can both agree to the terms that come with the change.
Disadvantages of refinancing
Even as we discuss the benefits, some cons come with refinancing.
You could pay more in interests
Even as you think about refinancing, you need to carefully examine the interest rate on offer and do your math. Find an online loan calculator and see if it’s worth refinancing.
What could potentially make you pay more is the loan repayment time. If you refinance, make sure you shorten the remaining repayment time.
Lenders may charge higher interest rates for older vehicles. When refinancing, make sure you talk to your potential lender. Give them your car model and how old it is before switching and realizing it’s more expensive than the initial loan.
There are costs to be incurred when refinancing
What are the terms of your car loan? Some lenders may need you to pay all the remaining interest before you can refinance. Read your loan terms well before finalizing with a lender so that in the case in the future you need to refinance it will not involve hefty costs.
The lender may charge transfer fees as well as termination fees (pre-payment fees, call provisions, penalty clauses, and closing fees).
Keep in mind that the new lender may also need an upfront cash payment. They may also charge transaction fees. Some states may even require you to re-register your car when you refinance.
Researching and knowing the finer details of your refinancing deal makes all the difference. It is what determines if it’s really worth refinancing or not.
Some circumstances could push you to refinance like if your credit score improves significantly. Whether you decide to refinance or not, you need to make sure to put the pros and cons in mind before getting yourself into a hole of debt.