Financing a vehicle is a convenient and easy way to pay for a vehicle over time, but as the financial world and your financial situations change, it might make sense to refinance your car to save money. So is it good to refinance your car?
As is the case with any financial decisions, there are pros and cons to refinancing a car, and it all depends on your personal situation. Lowering your car payment might reduce your monthly expenses, but it could cost you in the long run. Before you apply for a refinancing loan, do your research.
Pro: Lower Interest Rate
One of the main reasons to consider refinancing your car is to lower your interest rate. Reducing your interest rate can save you money over the life of your loan. A lower interest rate is great for someone with no credit or bad credit at the time of purchase. There’s also a chance that the interest rates have decreased since you originally purchased the vehicle.
Pro: Lower Monthly Payments
Another reason to consider refinancing your vehicle is to lower your monthly payments. Some people may need to lower their monthly expenses because of a change in job status or unexpected bills. Refinancing may require you to extend the life of the loan. The downside is that you will pay more money over the loan life if you extend it, especially at the same interest rate. However, refinancing may be the only option if you need immediate assistance lowering your bills or risk losing your vehicle.
Pro: Shorter Loan Term
If you have more money than you did when you first bought the vehicle, you might choose to refinance in hopes of shortening the loan term and reducing your interest. You may not have enough to pay off the car at once, but you can refinance for a lower interest rate and shorter loan term.
Con: More Interest Paid
Extending the loan term with refinancing means paying more for your vehicle. That also means more interest. The amount of interest you pay over the loan term will increase. If you’re extending the loan term, try to negotiate a lower interest rate.
Con: Higher Interest Rate
While the object is to lower the interest rate when refinancing, there are some situations where the lender returns with a higher rate than you currently have. If you bought your car new, most new-car loans have lower interest rates than a loan for a pre-owned car. Your credit score also affects your interest rates, so if that has decreased (or other factors on your credit report make you a higher risk now), your rates will be higher as well. Also, if the vehicle is older (5+ years), the lender may require higher interest rates or refuse refinancing outright.
Con: Potential Refinancing Fees
Be sure to ask about any potential refinancing fees. Auto refinancing loans often have added fees, but not all lenders charge the same. When comparing offers, read the fine print carefully so you don’t wind up surprised by the added fees.
7 Common Mistakes People Make When Refinancing a Vehicle
If you are asking, “is it good to refinance your car,” make sure you do your research before starting the refinancing process. Going blindly into the refinancing process can cost you in the long run. Here are some of the most common mistakes people make when refinancing a car:
- Not speaking with their current lender: Don’t start your refinancing journey without talking to your current lender first. They are already working with you, so you should see what options they might have for you. You may not need to refinance if your problem is a short-term one. The lender might have options for fee waivers, deferrals, and more.
- Not looking at your current credit report: This is a huge mistake many people make. Someone looking to refinance a car loan or mortgage mistakenly starts the process without looking at their current credit score and reports. If something is inaccurate in your report, it’s crucial to report it immediately. If you dispute the item and the creditor provides no proof, the credit agency must remove it. Someone with a low credit score could also use this time to increase their score, resulting in more attractive refinancing rates.
- Not getting multiple offers: Do not accept the first offer you receive or only apply with one lender. Getting multiple offers allows you to choose which one is best for you. If you are worried about submitting separate applications, use a service like Lending Tree that will enable you to compare multiple offers.
- Trying to refinance a car that is too expensive: If your vehicle is too expensive and you’ll still be struggling after refinancing, maybe you should consider a less expensive used vehicle. However, trading in your car might not be an option if you owe more than the vehicle is worth.
- Giving up after one application: Not every lender will want to refinance your vehicle. However, you should not give up after your first try if it’s unsuccessful. Instead, ask questions and try to find out why they denied your application. Use this denial as an opportunity to improve your application so you can try again.
- Refinancing at the wrong time: Timing your refinancing application is essential. You don’t want to apply after opening new credit cards or charging a considerable amount to existing accounts. If you know your credit score went down, work on trying to correct that before immediately refinancing your vehicle. Also, waiting too long into your loan could cost you a higher interest rate if the lender feels your car falls outside their preferred lending terms.
- Refinancing a vehicle with a prepayment penalty or termination fees: This scenario requires special attention. If you refinance your vehicle and your existing loan has a prepayment penalty clause, you could be stuck paying significantly more to terminate your current loan. Do the calculations and determine whether paying the penalty or fees is cheaper in the long run. Sometimes, paying off the prepayment penalty might cost you less because you save significantly more in interest with the new loan.
Refinancing a loan is a personal decision that is heavily determined on your specific information. For that reason, it’s impossible to provide a general answer to the question, “is it good to refinance your car.” Everyone’s financial situation varies, so what’s suitable for one person may not work for someone else.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.