Are you interested in getting or refinancing a car loan? It is invaluable to know the basics of what to expect and how you can decide whether getting a new loan is right for you. The following are some helpful tips and information when considering refinancing an auto loan.
What Is a Car Loan?
A car loan, much like a house mortgage or any other kind of loan, involves a financial institution lending you money upfront to purchase a car. Then, you pay the loan back over time, along with accumulating interest. You and your lender typically work out the details concerning the length of the loan term, monthly payment amount, interest rate, and any additional fees as you strike the deal.
Refinance car loan: Pros
You Can Lower Your Interest Rate
According to Lantern by SoFi, “The goal of auto loan refinancing is to secure a new loan with better rates or terms than your previous loan.”
Many people choose to refinance because interest rates dropped since they took out their initial loan. In some cases, a borrower may have accepted too high an interest rate the first time around and later decides to shop for a better rate.
You Can Pay Back Over a Longer Term
Choosing to lengthen the repayment period may be beneficial because it can allow the car owner to pay less with each monthly payment. For people whose car payment significantly eats up their monthly budget, this is a huge benefit.
Refinance Car Loan: Cons
May Not Be Suitable for Everyone
Where you are in your loan repayment can make a difference in whether refinancing is a good option for you. For example, if you are close to paying off your current loan, it will be harder to save money by refinancing.
May Damage Your Credit Score
Any time you apply for credit, the potential lender must conduct a credit inquiry, which can lower your credit score. If you have plans for a more significant purchase in the near future (like a house), you might not want to take the hit at that time.
How Do You Refinance an Auto Loan?
Just like with any loan, you will want to shop around and compare rates, terms, and offers. Most companies make this easy by allowing you to apply or estimate payments via online forms.
Be sure you have all the information you need about your current loan and check if your current lender charges any prepayment penalties. Once you have found a loan that works for you, you can sign the agreement and start making your new monthly payments.
Refinancing auto loans tends to be much quicker and easier than applying for and receiving other kinds of loans. If you suspect that you may qualify and would benefit from a new loan for your vehicle, it does not hurt to take the time to examine your finances and see what options are available to you.