Should you refinance your Car Loan?
What is refinancing? Before we answer this question, let’s first define what the term “refinance” means. Refinancing means you exchange an existing car loan with a seemingly more favorable loan term. You pay off the existing loan that you have from the proceeds of the new loan. You also use your car as collateral.
The average new car loan rate is pegged at around 7% or higher. The longer the terms are, the higher the risk the lender faces. This is the reason why it seems fair to have lower interest rates which if you calculate, in the end; the lending institution earns more from longer financial plans.
Car dealerships work in the same manner. Assisting prospective clients in acquiring loans from various lenders is part of their job because if they do not help, then you might not purchase the car, which means loss of probable profit to them. Most car dealers do not lend you the money themselves; in essence, they are the middlemen to get you approval of an auto loan from a bank or the financial arm of the auto manufacturers themselves.
What to do before signing up for a loan
Your best bet before signing up for a loan knows what the current interest rates are in the market. You, as the potential buyer and borrower, should arm yourself with the necessary know how before you decide on any purchases or loans. There is a ton of material available on the internet reserved for this purpose. You can even use online calculators for auto loan rates.
Refinancing can be advantageous for you if the rates your new lender offers are really lower or would benefit you financially in the years to come. However, you will need to scrutinize the package carefully. For example, are you exchanging a fixed rate term for an adjustable rate plan? Most adjustable rate plans have low initial loan rates because interest rates are expected to rise annually.
Risks and rewards
Fixed term rates may be advantageous even if they offer higher interest rates since you can expect how much you have to pay in monthly dues until the time you complete paying off your debt. The risk is that you may find yourself paying off a debt that is bigger than the real value of your car loan. The better alternative for fixed rate financing terms is to get the shortest possible length of time depending on your personal finances.
Adjustable rates can be beneficial to the borrower who has lesser income per month at the start of the loan since they offer lower rates. You may get this loan if you expect to have better personal finances in the future. Credit unions usually offer this type of financing. However, try to consider the following before signing up for refinancing; how many times can the rates be reset and is there a minimum rate and a cap (a ceiling for rate increments)? Refinancing could be favorable to your overall finances if it better suits your current and future financial capabilities.