If you’re paying a really higher interest rate, or aren’t happy with the length of your current loan term, it makes sense that you might want to refinance your car loan. Refinancing a car loan does not require that you skip out on making payments to your current lender. You can easily refinance a car loan by paying off the balance of the original loan and then signing up with another lender who would provide you with a new loan for the remaining amount.
You should thoroughly weigh out both the pros and cons before refinancing your car loan. It might be beneficial in some cases, but it’s not for everyone.
Pros of refinancing a car loan
Lower interest rate
There are many lenders who offer lower interest rates than what you’re currently paying. You should not just take their word for it but actually shop around and compare the best offers from various lenders before deciding to refinance your car loan.
Lower monthly payments
If you can get a lower interest rate, this would also mean that you will be paying less every month to the lender. This gives you more cash each month which you can spend on other expenses or save up for important goals like buying a house faster.
Longer loan term
The longer the term of your new loan, the lower your monthly payments will be. This would also mean that you will have to pay fewer interest fees since you’re borrowing money for a longer period of time. There are some car loans that offer car buyers an extended-term which means they can enjoy low monthly payments but end up paying thousands more in total compared to what they would have paid if they took a shorter loan term.
Cons of refinancing a car loan
Can impact your credit score
Taking out a new loan will affect your credit score since you are taking on more debt, which means there’s a bigger possibility that you might default on your new loan. If you do not meet the requirements to get a lower interest rate, or if you can’t afford a longer-term, refinancing your car loan could bring more harm than good.
Your new lender will have to order your credit report and score before they give their approval. You will have to submit some documents so that they can do an appraisal of your car at its current market value. If you want to change the term of your loan, you’ll have to pay for an appraisal of your car’s worth.
Entry and exit fees
There are fees involved in refinancing a car loan. Different lenders charge different fees, but both your existing lender and your new lender may impose a range of fees including entry and exit fees. An exit fee, which is also called an “early repayment penalty” will be charged if you decide to pay your new loan early.