You may be looking for ways to cut your monthly expenses and consider how you can reduce your auto loan payment by refinancing. Refinancing your car loan can help you save money, but it’s not always the best idea. Here are some guidelines on when to refinance and when you should stick with the payments you have now.
Reasons to refinance your car loan
Before you start checking around to get your auto loan refinanced, you should think about why you are doing it. There are a few good reasons to refinance, such as getting a better interest rate. If you got the loan when interest rates were high and you have the opportunity for a lower rate, you should take advantage of the opportunity. You’ll save money on the amount of interest you have to pay.
Another reason many people want to refinance is to lower their monthly payments. If you’ve suffered a job loss or a pay cut, it may be beneficial to refinance and get a lower payment to help you stay afloat.
Just remember that when you refinance, you could end up paying on your auto loan longer than with the original loan. If you’re saving interest, you may come out ahead. On the other hand, you might end up paying more for your car if you refinance to reduce the payments. Of course, it’s a better option than getting repossessed.
When not to refinance
There are times when it doesn’t make sense to refinance even if it may seem like a good idea at the time. First of all, don’t try to refinance if your credit rating is poor. You will likely get denied, which will only ding your credit even more. If you are approved, the interest rate will probably be high, which means you’ll pay more for your vehicle.
Along the same line, don’t refinance when you have a high debt-to-income ratio. Lenders will probably reject your application because you’re too high of a risk. Get your expenses under control, and then apply for refinancing.
If you own an older model, don’t refinance. You’re at a greater risk that the vehicle will need to be replaced before the loan is paid off. If your lender allows you to roll this loan into a new one, you’ll end up owing more than a new vehicle is worth right from the beginning.
Another time when refinancing doesn’t make sense is when you’re planning to a buy a house. You don’t want to make any major changes to your finances during this time. It’s better to wait until after you purchase your home to refinance.
Refinancing your car loan can be a smart decision if it benefits you now or in the future. However, there are times when it may not be a good idea. Think through your reasons for refinancing and make certain that you are improving your situation before you sign on a new loan.