Should I Refinance My Used Car Loan?
You may benefit from refinancing your existing loan on that pre-owned car you bought
A car loan can help you afford a nicer pre-owned vehicle by paying for the purchase in monthly installments rather than all at once. When you initially finance the deal, you’re subject to the best rates and terms your available lenders will offer you. However, factors like your credit score and monthly income can change over the course of your loan, and you may want to consider refinancing your used car loan.
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How refinancing a car loan works
Refinancing any loan — vehicular or otherwise — involves taking out a new loan to pay off the remainder of your existing loan. Consequently, your monthly payments will go toward paying off the new loan at its own terms and fees.
You can refinance a car loan through your current lender or a different lender who offers a better deal. The refinancing process involves filling out paperwork, undergoing a credit check, and paying processing fees just like your initial loan did.
Why people refinance their car loan
The reason most people refinance their car loans is to get a better deal. This could result from the market changing, their credit score improving, or their income improving drastically. These factors could yield a lower interest rate than the original one, which would save the borrower from paying as much in interest every month.
Your financial situation may have gone downhill and you’re struggling to handle the monthly payments. Refinancing allows you to potentially lower your monthly payment by enacting a new loan with a longer-term length, spreading the principal out across more time. Just keep in mind that the hit your credit score will take by financing another loan won’t help your long-term financial situation.
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Other factors to consider
The tricky thing about financing a used car is that if you don’t pay the loan off quickly, the car could depreciate to a point that you owe more on it than it’s worth. It’ll be difficult to find a lender who’s willing to offer you a new loan at a competitive rate if your car isn’t in good shape or worth much.
If you have extra money in your bank account, the best way to save from paying extra on a car loan is to pay it off quickly. Instead of refinancing, put extra cash toward the principal so you pay it off sooner than the projected term date. But if you still have multiple years left on the loan and would rather put the money elsewhere, refinancing could be your best solution.
Aaron is unashamed to be a native Clevelander and the proud driver of a Hyundai Veloster Turbo (which recently replaced his 1995 Saturn SC-2). He gleefully utilizes his background in theater, literature, and communication to dramatically recite his own articles to nearby youth. Mr. Widmar happily resides in Dayton, Ohio with his magnificent wife, Vicki, but is often on the road with her exploring new destinations. Aaron has high aspirations for his writing career but often gets distracted pondering the profound nature of the human condition and forgets what he was writing… See more articles by Aaron.