Did you know that the average time for car loans for first-hand cars is 69 months, while for second-hard cars it is 65 months? If your cash is low or you see a deal with a good interest rate, then refinancing your car loan seems quite appealing.
There are times when you possibly get a much better deal from a certain company, but it is always good to make sure that there is something in it for you when you refinance your loan. Refinancing has many pros and cons, so we made a list here, which has everything you need to know.
Refinancing Pros and Cons
1. Reduces Your Interest Rate
If you want to refinance your car loan, a reduction in your interest rate is one of the biggest pros. In case you had a poor credit score or no credit score previously, consider refinancing after some years to see if you get better offers or not. Your credit score possibly improved during this time to qualify you for a much lower rate of interest.
When the interest rate is low, you pay off your loans quite fast or lower your monthly car payments at the same pace. Whatever the case is, you pay lesser amounts of money.
2. Lowers the Monthly Payments
Sometimes we undergo big changes in our lives that require quite a lot of funds. Examples of big changes are medical emergencies or having babies. In these situations, you have no other option but to reduce your other monthly expenses to make room for this one. Refinancing offers you ways out where you lengthen the loan time period and thereby reduce your monthly payments.
Perhaps you originally had 2 years to repay a loan and you extend that to five years. This also helps you to have money to use when going through a rough patch financially.
Changing lenders can be a pro or a con, depending on what kind of relationship you have with the current moneylender. If you feel that your lender does not offer you too many benefits, consider changing.
3. Improves Your Cash Flow
If you currently owe less money than what your car is worth, get a refinancing done. For example, if you owned a car for three years and it is now worth $8000 but you owe $5000 for the auto-loan, refinance the car for $6500. In this case, the money you owe is still less than your car’s worth and you have an additional $1500 to spend on more important things.
However, always be careful about one thing — a car, unlike real estate, is a depreciating asset. It potentially loses more than 10% of its original value within just the first month of owning it. After a year, it loses more than 20% of its value.
4. Costs of Refinancing
At times, you can refinance with a lower rate of interest, but since the loan extends, you have to spend more over the entirety of the loan. If unsure, have a loan calculator handy to check how much you save overall.
Refinancing a car loan sometimes occurs just to free up some cash. However, be aware of places that charge you very high rates of interest. This is because most lenders charge higher interest rates on older cars.
If you wish to refinance your old car, you will notice a difference between the interest rate provided currently and the one you could have gotten when the car was new.
Final Notes
Refinancing your car loan is often a great option but not always. So always do your research thoroughly and check all the available options for refinancing your car loan. Check around to see what kinds of interest rates are available in the market.
It is also a wise idea to keep the length of the loan as short as possible to fit your budget frame. The shortest loan term, along with low-interest rates, helps you fetch a good deal.
