Refinancing a car loan refers to taking on a new or used car loan in order to pay off the balance of your existing car loans. Most of these loans are actually secured by a car. And paid off in fixed monthly payments over a predetermined period of time. This predetermined period of time is usually a few years.
The reason why people generally refinancing a car loan is basically for saving money. This is because this refinancing could score you a lower used car rate of interest. As a result, it can actually decrease the monthly payments and free up cash for other financial obligations.
Even if you are unable to find a more favorable rate, you may be able to find another loan with a longer repayment period. Therefore, this might also reduce your monthly cost, although it might increase the total cost of interest over the life of the loan.
When should you hold off on refinancing?
Refinancing loans can actually save you money. But, it is not always the best option. You may also want to hold off on refinancing if any of these following applies to you:
You’ve already paid off most of your original loan.
Interest is often front-loaded. This means that you pay more of it off at the beginning. The longer you wait to refinance, the lesser you are able to save on interest.
Your car is old or has a significant amount of miles on it.
Cars tend to depreciate quickly. So, you will likely be able to refinance car loan within the first few years of owning a car. Some lenders for an instance may not refinance cars that are older than seven years or have more than 75,000 miles on them.
The fees outweigh the benefits.
It is important to look out for any fees associated with refinancing. For instance, there may be prepayment penalties for paying off your original loan with your refinance loan. You may have to pay some extra interests in addition to the principal amount.