For most people, a vehicle is a necessity. Whether commuting to work, getting the kids back and forth to school or sports practice, or running errands around town, having your own vehicle is extremely convenient.
However, the need to have a vehicle in good working order means that, sometimes, you may have to purchase a car at an inconvenient time, such as when you don't have a large down payment saved up or when interest rates are high. But just because your initial purchase didn't come with great loan terms, it does not mean you have to live with those terms forever.
When you refinance a vehicle, your vehicle stays the same, but your financial situation doesn't. Let's dive into the details.
We don't refinance loans at Mike White Ford in Coeur d'Alene and Sandpoint, Idaho. Still, we want our customers to understand their options when it comes to vehicle ownership. Below is an explanation of how vehicle refinancing works, a breakdown of some of the pros and cons of refinancing your auto loan, and how to know whether it's the right move for you.
What Is Auto Loan Refinancing?
Refinancing a car loan means replacing your current loan with a new one, usually from a different lender. The new loan pays off your existing balance and comes with different terms, which might include a lower interest rate, shorter or longer loan term, or lower monthly payments. The goal is usually to save money, improve your cash flow, or adjust your loan to fit your financial goals better.
Pros of Refinancing
If your car is relatively new, you may have the option to refinance your vehicle with a different lender. Each lender is different; while some require a car to be no more than five years old, some will allow refinancing on vehicles up to ten years old.
If you want a lower rate, you may be able to obtain it if:
- A bank or other lender is offering a limited-time refinancing incentive.
- You found a lender that offers a more competitive rate than the lender who originally financed your vehicle.
- Central bank lending rates have been lowered due to government financial policy.
- Your credit score has improved.
Even a loan with a one-point drop in your interest rate can lower your monthly payment and save you hundreds, or even thousands, over the life of a loan. For example, if you take out a car loan for $25,000 at a rate of 6% over 60 months (five years), your payment will be $483 per month. If you keep to the payment schedule, you will pay about $4,000 in interest by the time the car is paid off. If you borrow the same amount at 5% interest, your payment would be $472 per month, and you would pay about $3300 in interest over the life of the loan. You can access loan tools online to help you calculate your payments and savings for different interest rates.
In addition to a lower rate, you can lower your monthly payment by extending the term of your loan, even if the interest rate stays the same. For example, using the same loan above ($25,000 at 6% over 60 months), your payment would go down to $414 per month if you extended the term to 72 months (6 years). However, be aware that extending the term at the same rate means you will pay more interest over the life of the loan. In this example, it would be over $800 in additional interest.
As you may see from these examples, better interest rates and longer terms can free up more money every month, and a combination of the two can save you even more. The most compelling reasons in favor of refinancing include:
- Lowering your interest rate to save money over the loan term.
- Reducing your monthly payment to save money in the short term.
- Paying off your car loan more quickly (although you may have the option to pay early on your current loan without refinancing).
- Removing a co-signer on your car loan (often applicable to younger buyers who failed to qualify for financing on their own when the car was originally bought).
- Switching lenders, loan types, or other loan terms to obtain better service, more flexible repayment options, or other benefits.
Cons of Refinancing Your Auto Loan
Given all the advantages of refinancing, you might be thinking that refinancing is a no-brainer. However, there are some valid reasons that you might opt to leave your current loan in place. For example:
- Refinancing at the current available rates will ultimately cause you to pay more over time.
- You owe more on your loan than your car is worth: In other words, as you pay the new loan down, at some point, the amount you owe will be more than the amount you would receive from a vehicle sale.
- Refinancing would subject you to fees or penalties: Before you refinance, check the terms on your current loan; some financing contracts impose prepayment penalties. Also, carefully review new loan offers; some come with fees for originating the new loan. Either one or both could cancel out any financial benefit of refinancing.
- Credit impact from the new loan application: As a general rule, applying for a new loan triggers a credit inquiry, which could cause a dip in your credit score. Though usually minimal, it may be important if you are planning on making any other major purchases in the short term.
- Your car is almost paid off: If you don't have many payments left, the savings may be real, but they may not be significant enough to justify the hassle of applying for a new loan and taking the credit hit.
Better Information Means Better Decisions With Mike White Ford
At Mike White Ford, we keep our customers informed about everything related to cars, whether it's the latest innovation under the hood, a handy tip on car maintenance, or a helpful accessory. However, the financial aspects of purchasing and owning a car are also issues where information is critical. Refinancing is an option that can help make car ownership less stressful for owners, putting them in greater control of their financial situation.
If you are looking for a new or used vehicle, contact Mike White Ford today or stop by one of our showrooms. Our finance team can help you identify the best financing options available from a variety of lenders and explain all the details. With the right deal, you may never have to consider refinancing. Smart ownership starts with smart financing, giving you maximum control over your financial future.