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Refinancing Car Loans: Find a Better Deal on a Car Loan
December 7, 2020● 4 minute read●
How nice would it be to save money on that current car loan? Well, it doesn’t have to be all wishful thinking. Refinancing your car loan is an option that can save you money and offer more control and flexibility if done wisely. It could lower your monthly payment and save you hundreds or thousands of dollars. Want to know how exactly this works and if it’s the best option for you? Then sit back and enjoy the knowledge ride!
How does refinancing work?
Refinancing is really not a hard nut to crack, especially when it has to do with car loans. It’s simply moving from one car loan to another, usually with a different lender, in hopes of saving money with a lower interest rate. In this case, you borrow money from a new lender to pay off the balance of your current car loan. You will then make monthly payments on your new loan based on a newly signed agreement, till the principal and interest is fully repaid.
Should I refinance my car loan?
Refinancing is an important decision and they’re a lot of factors to consider. Auto refinancing will make sense if;
Interest rates drop
The market is constantly changing. These changes happen due to a lot of economic factors like increased marketplace competition and regulatory changes. What seems like a small percentage drop might actually make a huge difference in your monthly repayments. You can decide to refinance your car loan if the rates have dropped significantly since you first signed a loan agreement.
It’s also possible that you were in haste while taking your current loan. You probably just needed a car at the moment and didn’t take time to research the market for the best rates. Refinancing might be an option for you if you’re not too far gone on your current contract. Be sure you’re not paying too many extra fees though, as this can alter the saving point.
You’re having trouble keeping up with payments
Finances can get really tough at times. If you just lost your job or had to move to a lower-paying job, keeping up with monthly repayments might prove difficult. In this case, you might seek to extend your loan period. This will significantly reduce the amount you have to pay per month because the loan payment will be divided by more months. You also get to keep your credit intact.
It’s worth noting that this will also increase your interests, as more interests will be paid with the increased loan term.
You have a good credit score
If you’ve been able to constantly meet up with all loan repayments at the agreed time, it’s very likely that your credit score has increased. A higher credit score might give you an option of negotiating better rates with your lender. It can also help you find a different lender with a better rate. You have higher chances of getting a good deal with a better credit score.
You want to manage your balloon payment
Sometimes you get a lower monthly loan repayment because of a large balloon payment. You can manage this by refinancing and spreading your balloon payment, instead of paying it all at once.
Steps to refinance your car loan
Confirm the existing details of your current loan
Before you start looking around, it is important to gather important details about your existing loan. Check your paperwork for your current interest rate, loan term, minimum repayment and loan balance. This might seem like a lot of work but the importance cannot be overstated.
Compare and carefully consider your options
Compare the terms from various lenders and be sure to settle for one that meets your current need. Check the fees and be sure of every extra cost you’re incurring like early repayment penalties.
You can start with your current lender, asking if they can offer better rates before branching out. Carefully evaluate every contract and be sure it has all the features you need. Be sure you’re not paying more interests from a long term loan. Also, make sure you’re eligible for the loan.
Check your credit
It’s important to note that you might not qualify for some loans if your credit is low. This tells the lender that you’ve not been making repayments as at when due. However, if your credit score has increased, you have higher chances of getting better deals and rates.
Apply for a refinancing
After carefully considering your options, settle on a lender that suits you best and file your application. Most non-bank lenders allow you to apply online for a faster process.
Repay your existing loan
The first step after signing a refinancing contract is to repay your existing car loan and other fees incurred.
Make repayments on your new car loan
After setting all the debts on your former agreement, start making regular repayments on your new loan.
Pros of refinancing a car loan
- Lower repayments if you’re able to negotiate a deal with lower interest rates and fees. This will also cut cost and save you money in the long run.
- Better services and features with a new lender. You might get additional features that offer you flexibility and control. Your new lender might also have better client support and more convenient options to make it all easier for you.
- Longer loan terms with less monthly repayments. Refinancing a car loan can offer a reduced payment to people presently struggling to meet up financially. It relieves the burden over a period of time.
Cons of refinancing a car loan
- Switching fees might cost you more. You might have to pay early repayment fees or early exit fees plus other fees that might drain you financially.
- Longer loan terms will lead to more interests paid overtime. Lenders make money off interests per month, the longer your loan term, the more interests you’ll pay over the months.
Make sure you’re not switching loans towards the end of your loan term, as this might not seem very profitable.
Written by Jacaranda Team