The Pros And Cons Of Refinancing Your Car Loan

If you’re looking to get a better interest rate on your car loan or you want to lower your monthly car payment, you may consider refinancing. Refinancing simply means that you pay off your existing loan and take out a new one with different (and hopefully better) terms. Generally, you may be eligible for a refinancing if you have a good credit score and a solid payment history. However, while it may be a good idea to seek more favorable loan terms on your car loan, it’s important to weigh the advantages and disadvantages before doing so.

Determining whether refinancing your car loan is a good financial decision depends on a number of factors including your current loan’s interest rate, the amount of equity you have in the vehicle, the amount of your monthly payment and your overall financial health. You also need to consider the short- and long-term financial benefits that refinancing can offer.

Ultimately, the primary advantage of refinancing your car loan is that it can save you money over the long-term in terms of the interest you pay. If interest rates have dropped since you took out your original loan or if your credit score has significantly improved, qualifying for a lower interest rate can potentially translate to big savings. You can also extend the length of your loan to reduce your monthly payment if you need to free up room in your budget. For example, refinancing a four-year, $22,000 car loan into a new five-year loan at a lower rate can decrease your payment by as much as $100 a month. Reducing the same loan’s interest rate by just one percent could also save you several thousand dollars in interest over the life of the loan. You can then use the extra money you’re saving each month to pay down debts, fund your retirement accounts or save for a rainy day.

If you’ve managed to build up some equity value while paying on your current loan, you may also be able to enjoy the benefit of a cash-out option if you choose to refinance. When creating the new loan agreement, your lender will base it on the vehicle’s current value. Typically, lenders will use guidelines established by the National Automobile Dealers Association (NADA) to determine your car’s worth. If the lender determines that your car is worth more than you owe, they will pay off the old loan and return the difference to you. Refinancing when you have equity in your vehicle can be appealing, especially if money is tight and you need extra cash.

While refinancing offers several advantages in terms of savings and possible cash back, it is not without its drawbacks. For example, you may be subject to a prepayment penalty for paying off your existing car loan early. In some cases, refinancing can actually end up costing you more money in the end.

Negative equity means that you owe more on your loan than the car is worth. Even if you have excellent credit, having negative equity can make it difficult to convince a lender to help you with a refinance since the new loan will only be partially secured. If you do find a lender that is willing to offer you a new loan, you may be able to lower your monthly payments by extending the loan but it’s unlikely that you’ll be able to secure a better interest rate. Your lender may also require you to pay the difference between the amount you’re borrowing and the amount your car is worth before approving the loan. If you’re not upside down on your current loan, refinancing can put you at risk for negative equity if the vehicle depreciates significantly prior to the end of the loan.

While refinancing can help you to lower your monthly payment, it can also put you in the position of paying on your loan for a longer period which may not save you any money in the long run. If you’ve only been paying on the loan for a short period of time, chances are that most of your payments have gone to interest rather than principal. If you’ve already been paying on your loan for several years, you most likely have paid most of the interest off already. Refinancing too early or too late in the life of the loan is essentially the equivalent of starting over which can end up costing you more money in terms of the interest you’ll pay. Adding months or years to your existing loan term also keeps you in debt longer, which can prevent you from making progress on your other financial goals.

If you’re contemplating a car loan refinance, it’s important that you do your homework beforehand in order to make sure you’re getting the best deal available. You may want to talk to your current lender or contact banks and credit unions in your area about the possibility of refinancing. You can also search online to compare refinancing rates. Before you finalize any refinancing agreement, read the fine print carefully to make sure you’re not paying any unnecessary fees or agreeing to any terms you’re not comfortable with.

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    Refinancing an Upside Down Car Loan

    Refinancing car loan ally

    February 10th, 2016

    Refinancing car loan ally

    If you#8217;re upside-down on your car loan, meaning you currently owe more money than the car is worth, don#8217;t panic. There are a few things you can do to help alleviate the situation.

    While many people think refinancing the car is the best way to go, lenders will not lend more money to you than the car is worth. Since the car is used as collateral, they would lose money if you were to default on the loan. However, don#8217;t lose hope—there are other solutions to getting out of an upside-down car loan.

    Solutions for an Upside-Down Car Loan

    Make extra payments toward the car

    Most won#8217;t want to hear this, but unfortunately this is going to be the best solution for your current situation in the long-run. Consider picking up a side job, cutting cable to reduce your monthly expenses or cooking at home instead of going out to eat to save money. Any extra money that you have should be put toward the car loan. Within a few months to a year, you should at the very least owe what the car is worth. Then, you can refinance into a lower rate and reduce your monthly payments.

    Get a personal loan to pay off the car

    This is only a good idea if the interest rate on the personal loan is lower than on the car. You can use the money you receive to pay off the car, and then work toward paying off the personal loan. While taking care of debt with a different form of debt is not always the best solution, it can be very helpful for the time being as long as you work at getting your financial situation under control.

    Use a home equity loan to pay off the car

    If you own a home and have built up equity in it, you may be able to qualify for a low interest home equity loan to pay off the car. Since home equity loans use your house as collateral, the interest rates are low. Unfortunately, if you don#8217;t have a home with equity in it, this will not be an option for you. Borrowers should also take note that if you fail to repay your home equity loan, you are at risk of losing your home. Make sure to always make your payments on time each month.

    How to Avoid an Upside-Down Car Loan

    Even though you may currently be upside-down on your auto loan, it doesn#8217;t have to dictate the future of your finances. Work hard to get this situation under control and use it as a lesson when you purchase your next vehicle. Some things to consider to make sure you do not end up in this same situation again include:

    Shop around for your auto loan

    Do not assume that the dealership will offer you the best rates. In fact, this is hardly ever the case. Compare auto loan quotes and comparison shop different lenders. With LendingTree, we do the work for you. Simply fill out one form and we will match you to lenders that meet your unique criteria, ensuring you get the best possible interest rate on your auto loan.

    By having a decent down payment (at least 20 percent), you should never wind up upside-down on your loan even as your car depreciates, assuming you are making all of your monthly payments on time and your car loan is not extremely long (no more than 60 months).

    Make extra payments toward your car

    Just because the monthly payment is $220, for example, doesn#8217;t mean you can#8217;t pay $250. If you receive a raise, get a bonus or have an extra check one month, put some of that money toward your car. By paying down your loan as quickly as possible, you#8217;ll always be on top of your loan and should never wind up with a loan that#8217;s greater than the car is worth.