Refinancing is one of the most appealing ways to reduce the costs of your auto loan. The extra cash you can get here can be saved for your future or added to your monthly budget. But, should you refinance your auto loan in the first place?
Auto Refinancing Defined
When refinancing your auto loan, you are basically paying off your original loan’s balance then getting a new loan to replace it. There are times when changing lenders might be necessary because many lenders are not going to refinance their own loans. But, auto loan refinancing will help you lower your payments every month or adjust the term of your loan.
There are three situations when it makes perfect sense to consider auto loan refinancing.
1. You Want to Lower Your Monthly Payment
If the monthly payment for your auto loan is quite high, refinancing can reduce this cost every month. When you pay your original loan longer, your principal balance will also be lower.
This means that if you will start a new term with this balance, the leftover funds are going to be spread out over a new period of time. You can lower your payment every month if you extend the term of your loan if you receive a lower interest from the lender or both.
It is usually one of the reasons why borrowers decide to refinance. A smaller payment every month can help you with your monthly budgeting.
2. You Wish to Lower Your Interest Rate
You might be stuck with an auto loan with a higher interest rate because of various reasons. However, this will still cost you hundreds or even thousands of dollars during the life of your loan.
For instance, you borrowed $20,000 for a car for a 60-mont term at a 6% interest rate. Throughout the life of your loan, you will pay an interest of almost $3,200. If you apply for the same term and loan but this time, it has a 3% interest rate, you will only be paying a little less than $1,600 in interest during those five years. Although this might not sound significant enough when you first took out the loan, the interest can add up after some time.
3. You Want to Add or Remove a Co-Borrower
You will only be able to add or remove a co-borrower from a loan if you can refinance under the name or the names of the people who should be part of the loan. One very common reason for removing a co-borrower is if a person cannot be approved because of their personal credit history and the only choice left is for them to co-borrow. This time around, the person has already established their credit history and is already confident that they will be able to get approval all alone with no need for a co-borrower.
Refinancing your auto loan can make perfect sense during the above situations. However, don’t forget that just like anything else in the world, there will always be risks involved so make the necessary considerations before you decide once and for all.