Checking on your financial health regularly, just as you would for your car, can help you perform at your peak performance. For those who are concerned that they are devoting an excessive amount of their paycheck to their car each month, refinancing their car loan may be an option.
You may be wondering if refinancing will make a significant enough difference to be beneficial to you. An overview designed to help you understand the fundamentals of refinancing an existing car loan, including how much you could potentially save and other important information.
What Is the Process of Refinancing a Car Loan?
The term “refinance” refers to the process of replacing an existing car loan with a new one to lower your monthly payments or reduce the amount of interest you pay over the life of the loan.
Here are some of the most common reasons why people choose to refinance their car loan:
- To reduce their monthly loan payment
- To bring their interest rate down.
- To reduce the length of their loan term
- To extend the term of their loan
Refinancing your car loan is a simple way to improve your financial situation, but it is not right for every borrower. It is dependent on a variety of factors, including your financial situation, current loan terms, and others. We should first determine whether or not it is even worthwhile for you to get started before we discuss how to get started.
Is Refinancing a Good Investment?
If you see an example of how refinancing can help you save money, it may help put things in perspective.
Consider the following scenario: you take out a $20,000 car loan over 60 months at an interest rate of 8 percent. This would result in an estimated monthly payment of approximately $406. The total amount you would pay if you paid off your loan on time and without missing any payments would be approximately $24,332. Assuming you make all of your payments on time, your loan balance will be reduced to approximately $16,611 after 12 months. When that time comes, if you refinance, you’ll end up paying a total of approximately $18,362 on that loan. You could get a loan for $16,611 for the remaining 48 months at a lower interest rate of 5 percent. The total cost of your loan would be approximately $21,751 if you include the amount you have already paid toward the original loan. Compared to the original loan, you will have paid $2,581 less in interest and fees.
If you want to experiment with different interest rates and terms, you can use auto refinancing calculator, which is a quick and simple way to crunch the numbers and see how much money you could save.
The Advantages and Disadvantages of Refinancing a Car Loan
Now that you’re aware of the potential savings, let’s take a step back and consider the advantages and disadvantages of refinancing your car loan.
Advantages of Refinancing
The Disadvantages of Refinancing
You have the option of lowering your interest rate as well as your monthly payment.
Your interest rate on your refinanced loan may be higher than the rate on your original loan.
Increasing your cash flow by lowering your monthly payments is a possibility.
Some lenders may charge you a prepayment penalty if you pay off your original loan before the agreed-upon time.
If you reduce the length of your loan, you may be able to save money on interest.
If you choose to extend the term of your loan, you may end up paying more in interest over time.
These are some of the most fundamental advantages and disadvantages of refinancing a car loan. Your credit score, on the other hand, is something that could work in your favor or against you.
Now that you have a better understanding of the advantages and disadvantages of refinancing a car loan, let’s look at the best time to refinance.