Unless you live in a major city, you most likely use a car for your transportation needs. In fact, according to a recent Gallup study, 77% of Americans use a car to commute to work. While a car may be a necessity for your transportation, this doesn’t mean you have to spend a costly amount on your monthly payment.
If you’re struggling to afford your payments, you may want to consider refinancing your car loan for better terms and a lower interest rate.
WHAT IS REFINANCING?
Refinancing means you’re swapping your old car loan for a new one—preferably one with better terms. If refinancing doesn’t lower your payment or rate, you’re gaining nothing from the transaction.
BENEFITS OF REFINANCING YOUR CAR
The first benefit of refinancing your car loan is the potential to receive a lower interest rate. If you had bad or poor credit when you purchased your car, it’s worth your time to consider refinancing every few years to see if you can receive a better offer. With a better credit score, you may receive approval for a lower interest rate. A lower interest rate will benefit you by helping you pay off your loan faster and saving you money over the course of your payments.
Another benefit to refinancing could be a lower monthly car payment by extending your auto loan. Sometimes, unexpected expenses arise causing you to need extra cash. Whether you have medical bills to attend to or costly emergency home repairs, you may need to reduce your monthly expenses. Extending the length of your loan can help you achieve lower monthly payments. For example, if you have two years left on your car payment, you may want to extend your term to 4 years. Adding multiple years to your loan can significantly lower your monthly payment.
Lastly, refinancing your car loan can increase your cash flow. If you owe less than the value of your car, you may be able to access additional cash by refinancing. Let’s say your vehicle is worth $9,500 and you owe $4,000 on your auto loan. If you need a little extra cash for emergency expenses you may be able to take out a $5,500 auto loan and use the extra cash to take care of your unexpected expense. But be careful with this option, you don’t want to risk going under water if your car ends up holding less value than your remaining loan balance.
DOWNSIDES TO REFINANCING YOUR CAR
While the intention of refinancing is to receive better loan terms, sometimes the opposite scenario occurs. If you choose to extend the length of your loan to either lower your payments or take the cash, you could end up paying more in interest over the course of the loan. Getting a lower rate may be what you’re looking for, but it’s important to do the math before moving forward with a new loan. Luckily, there are plenty of loan calculators available to help you determine if refinancing is a smart move. Credit Karma has a great loan calculator available to get you started.
You should also be cautious of higher interest rates. If fast cash is your motivation for refinancing, you may end up with a higher interest rate. Since a lot of lenders charge higher interest rates for aging cars, you may want to stay clear of refinancing if you have an older vehicle.
So, should you refinance your car? The answer is dependent on the numbers. If you’re in a tight financial situation, you may want to entertain the idea of refinancing. Do your calculations ahead of time and determine if refinancing your auto loan is right for you.