What are the Benefits of Refinancing Your Car Loan?
It might not be widely known, but many drivers choose to refinance their car loans to save money. Are you thinking of doing the same thing?
Before you do, make sure that you’ve weighed up its pros and cons. You want to be certain you’ll reap the benefits of refinancing a car loan.
So, what exactly are the advantages of taking this route?
Benefits of Refinancing a Car Loan
If you want to lower your monthly instalment for the car, reduce the amount you have to pay for interest or have a longer or shorter repayment term, you may want to consider taking out a new car loan.
Interest Could Be Lower
Say you took out your first car loan when you had a poor credit score, and it has improved since then. When you apply for refinancing, you might be able to qualify for a better interest rate.
Assess your payment record to check if you’ve made your payments on time for the past six to 12 months. It’s also possible that interest rates, in general, have dropped as well.
A combination of both can pull down the interest applied. If the rate is 1% lower than your current loan, you can save a substantial amount, making your second loan worthwhile.
More Affordable Monthly Payments
Getting a second loan can help make the monthly instalment amount more budget-friendly. If you have lower monthly payments to take care of, then you can use the money saved to pay off other loans and debts you may have.
If there’s a drop in your income, then a more affordable monthly repayment amount can help a great deal in making sure you still meet your needs whilst paying off your financial obligations.
Do note that to reduce the monthly repayment amount significantly, you would need to choose a longer loan term. This means you’ll be borrowing money longer and will be paying more interest over the duration of the term.
Pay Off the Car Loan Earlier
If there’s a change in your financial situation, and you now have more income since the time you financed the car, then you may want to think about refinancing your car loan and choose a shorter repayment term.
This way, you can pay off the loan sooner and own the car. It’s a more direct route if you want to get done with your current loan.
Use the Car’s Equity for Emergencies
You might find yourself in need of cash because of an emergency. You can actually refinance your car loan using the vehicle’s equity. This is the value of the car minus how much you still owe on it.
Let’s take a look at this example. Say the car’s worth is £20,000, and the amount you still have to pay is £10,000. You might be able to take out a second loan of £15,000, and since you only need to pay £10,000 for the first loan, you can take the remaining £5,000 in cash.
But be aware not all companies will allow this, so you need to check first. Refinancing a car loan sounds good and advantageous, but be aware that it still has some downsides, and you have to know them before you take out a second loan.
Learn as much as you can about the pros and cons of refinancing your car loan so you can arrive at a sound decision and make the best choice for yourself.
Downsides of Refinancing a Car Loan
Of course, doing this isn’t without some drawbacks. For example, you’d have to pay certain fees, take into account additional interest, or reach negative equity, which means owing more money than what the car is actually worth.
You Might Pay More Interest
This may seem contradictory to the one mentioned previously. But if you get a second loan and want to reduce the monthly repayment amount, you’d most likely have to choose a longer repayment term.
So, even if the monthly instalments are more affordable, you’ll keep on paying them for another one or two years. This means you’ll pay more interest if you add them all up.
Prepare to Pay Fees
Before refinancing your car loan, check with your current lender if there are any penalties for paying off the loan early. You may also check your copy of the car loan agreement to see if there are other charges you need to settle when you choose to take out a second loan.
When you already have the figures, compare that amount to how much you can save if you refinance your car loan.
Reaching Negative Equity
By refinancing, you’re extending the repayment term. You have to be careful with this because you might end up owing more than the actual value of the car, also known as negative equity.
When the time comes to sell the vehicle or trade it in, you might find yourself having to pay your lender the difference, and this could reach thousands of pounds.
Is Refinancing for Me?
Not sure about refinancing yet? Here are some key points to remember.
Know your goal
Do you want a lower monthly repayment amount, need cash for an emergency or just pay off the car loan sooner so you can own the car already?
Your objective for taking out a second loan must be clear. Also, make sure refinancing will be able to help you achieve that goal.
Remember when you took out the first loan and spent a lot of time shopping around for the best deals?
It’s still important to do that when you refinance your car loan. Find the best lenders with better rates and terms than the one you currently have.
Do the Math
There are refinance calculators now that are readily available online. You can use those to run the numbers and see if you can save money from refinancing.
Also, check comparison websites such as Clearscore to calculate estimates while comparing different deals, all at a glance.
It might come as a surprise to know you can refinance your car, but you can, just like getting a new utility supplier! And you can save significant money in certain circumstances, so it's worth a check.
But it’s also crucial to be strategic when refinancing your car loan. Identify the pros and cons of taking out a second loan and whether it can really help your finances.