Refinancing isn’t only for mortgages. You can also refinance your car loan to lower your payments and free up some cash for other expenses. Like refinancing a mortgage, refinancing a car loan also comes with some additional considerations.
Risks And Benefits
Although many people never think to apply for a refinanced car loan, it can be a good way to lower your monthly car payment. However, it does involve applying for a new loan on the vehicle. With the new loan comes the “closing costs” such as the down payment and tax, title and license expenses. It also means that the life of the loan may be extended, causing you to lose valuable time towards the end of loan life.
For example, if you have been paying towards a car loan at 5% interest for 60 months for the last 24 months, you would have 36 months left on the loan. Once you refinance the loan to, let’s say, 2% interest on a 48 month loan, you will have the full 48 months left to pay; essentially extending the amount of time left to pay off your car by a full 12 months.
Refinancing a car loan isn’t inherently bad, it just isn’t for everyone. Similar to the rules for refinancing a mortgage, it should only be done if the costs outweigh the risks. Can you afford the closing costs? Will the interest rate be lowered by at least one full percent or more? Will you save more than $100 or more dollars a month? Is the monthly savings worth extending the life of the loan? If you can answer ‘yes’ to at least three of these questions, then refinancing a car loan may be something to consider.