When Should You Refinance Your Car Loan
BY: STEPHEN MARSHALL ON TUESDAY, OCTOBER 17, 2017
Refinancing your car loan isn’t always a good idea, especially when you end up paying more for the same vehicle. In order to refinance your car loan, you will need to keep in mind that your new loan is better in terms of pricing when compared to your existing loan; you will need to have full information about your existing loan and your vehicle; and you need to be prepared with all the documentation to showcase your ability to repay. You can refinance your car loan when:
Interest rates have drastically dropped: This means that the interest rates have dropped more than a couple of points. Remember, anywhere between 1-2% means that it will have a big impact on the life of your loan.
If your credit score has improved: If your history of bad credit score has improved with a healthier credit rating now, then you might qualify for a lower interest rate. Making sure that your payments are done on-time for several months at a go can will help you determine how soon can you refinance your car loan. Keep in mind that good credit score means good auto rates.
Your personal financial landscape has had a negative or positive impact: If you have suffered from a financial setback lately, then refinancing could mean getting a bigger long term, hence lowering monthly payment. On the contrary, when your debt-to-income ratio has considerably increased, then undergoing a default risk and getting a higher interest rate could be one option too.
If your car lease is ending and you want to purchase the vehicle: This is because when you complete the term of the lease, you ideally have the option to buy the vehicle itself.
If you are looking at changing cosigner: If you want to remove an original cosigner, then now is the right time to get them off the papers. This is because cosigners can have a negative impact on the cosigner's credit and thereby removing them from the list would mean taking them off the financial risk.
While refinancing might be tempting, here are some mistakes you should completely avoid:
Stretching out the loan shouldn’t be your preferred mode as switching a 48-month loan to a 72-month loan will make you pay more than what you initially anticipated.
Extending the life of your loan by going the upside-down route shouldn’t be preferred. Conclusively, this would directly trickle down to the point where you would want to get rid of the car, you will either have to make repeated (monthly) payments on your car, not use it anymore or issue a check to your lender. And we all know, that is indeed not a good situation to find yourself in!
Keep a tab of prepayment penalties as they can be really brutal at times.
Waiting too long to refinance can certainly cost you. This is because rates are generally best on newer vehicles and some lenders won’t refinance loans for cars over a certain age. In fact, you might even get new car rate only of you refinance immediately after buying from a dealer and taking advantage of dealer incentives.
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