How To Decide If Refinancing Your Car Loan Is Right For You
If you have a loan on your vehicle, you may receive enticing offers inviting you to refinance your loan. Though it may be tempting to reduce your interest rate or monthly payment, take a few moments to determine if refinancing is the right move for your finances.
Determine Your Financial Goals
Take a moment and figure out what your financial objectives are. For example, you may wish to reduce your monthly expenses, or you may desire to become debt free as soon as possible. You may want to lower the overall cost of the debt that you carry.
Once you define your goals, you can decide if your current loan is satisfactory in helping you meet those goals. If it isn't, it is time to consider refinancing.
Figure Out if Refinancing Can Help You Meet Your Monetary Goals
Refinancing your loan can help you achieve your financial goals in multiple situations.
If you need to lower your fixed monthly expenses, refinancing can help you reduce your monthly payment in a couple of different ways. You can start your loan over with a new term to lower your payment. For example, if your original loan was $15,000 for 48 months at 3 percent, your monthly payment is $332.01. If you are a year into the loan, you have an approximate balance of $11,113.35 left on your loan.
You can refinance this balance into a new 4-year loan. Assuming an interest rate of 3 percent, your new payment is $245.98. Though extending your loan does reduce your payment, it also extends your overall interest costs.
Another way to reduce your fixed expenses and the overall cost of your loan is to reduce the interest associated with your auto loan. For example, if your original loan was for $20,000 for 60 months at 6 percent, your monthly payment is $386.66. If you are a year into the loan, you still owe about $16,159.60. You can refinance the balance into a loan with the same term as the amount of time left on your original loan and take advantage of lower interest rates. Assuming a 4 year loan at 3 percent, your new payment is $357.67.
Consider Any Fees
Most auto loans are low or no fee, but it is essential to take into account any fees when deciding whether or not to refinance. Determine how long it would take you to recoup the total of the loan-related costs. Inquire as to whether the loan comes with a pre-payment penalty so that you know what to expect.
The decision to refinance your auto loan can be tricky. Fortunately, by acknowledging your financial goals, you can make an informed decision about what car financing services are the best move for you.