Mortgage refinancing is especially popular and better understood than car loan refinancing. The same benefits that accrue from mortgage refinancing also apply to your car. However, refinancing your auto loan is easier, less complex, and takes a shorter time. Here are things to consider before deciding to refinance your car.
Your interest rate
This is the most important thing to consider. If the interest on your current loan is lower than current rates, then it obvious refinancing is not for you. You need to take into account the rate and potential costs of the new loan. Only then can you determine if refinancing is beneficial in any way.
Your credit score
You will get a better rate if your credit score is higher than when you took the auto loan. This will lower your monthly payments. The difference can be substantial if your credit score has improved dramatically. On the contrary, you will attract a higher rate if your credit score is lower, which makes refinancing untenable for you.
The term on your loan
Refinancing can be used to shorten the period of your loan. For example, you may have taken a longer term loan in order to enjoy lower monthly payments. This has the downside of saddling you with debt for a longer period, and increases your interest payments. Refinancing allows you to shorten the loan period, while still enjoying lower monthly payments.
If you are having problems paying your loan, refinancing might be a way of avoiding repossession. You can increase the term on your loan by refinancing, thereby lowering your monthly payments. This will of course raise the overall cost of the loan in the long run. However, it will at least buy you more time to sort out your finances. Furthermore, having your car repossessed will negatively impact your credit score. This will make it harder for you to access cheap credit in future.
The benefits of refinancing will be negated if the terms of your current loan include prepayment penalties. These are charges levied by the lender if you decide to prepay your loan. Additionally, if the new loan has high set up fees, you may be better off sticking with the existing loan. These fees will cancel out any potential gains from refinancing.