If you took out a loan to buy a vehicle, you may want to refinance it to lower your interest rate, reduce your monthly payments or access cash. Before you decide, shop around for the best terms and figure out if refinancing is the right long-term decision.
Lower Your Interest Rate
If your credit wasn’t so great when you originally took out a loan, you may have a high interest rate. If you have diligently paid your bills on time and kept your overall level of debt down, your credit score may be higher now than it was when you took out the loan.Â
That means you may be eligible for a lower interest rate, which can save you a substantial amount of money each month and reduce the total amount that you’ll have to pay in interest over the life of the loan. You may be able to pay off your car loan sooner than you originally planned, or you may pay it off at the same time but pay less each month.Â
Reducing your interest rate won’t necessarily save you money in the long run. If you also extend the term of the loan, you will make payments over a longer period of time, and you may end up paying more in interest.
Pay Off the Loan Faster
If your income has risen since you took out the loan, you may be able to pay it off sooner than anticipated. If you refinance and shorten the loan term, you may also be able to get a lower interest rate, which will save you money in the long run.
Reduce Your Payments
If you’re struggling to keep up with your bills, or if you would like to put more money toward paying off credit cards or saving for retirement, you may be able to refinance your car loan, extend the loan term and lower your monthly payments. That means you will pay off the loan later than you originally planned, but you will pay less each month. You will wind up paying more in interest, but you may decide that it’s worth it if you’re unable to meet your current obligations.
Access Cash
It’s possible to tap into the equity you have built up in your vehicle. If your car’s value is greater than the amount you owe, you may be able to refinance, increase your loan balance and get some money that you can use to cover emergency expenses or pay off higher-interest debts.
Be careful, though. If you take equity out of your car or extend the term of the loan, you may wind up owing more than the car is worth. That can make it difficult to sell or trade in the vehicle later.
Weigh the Pros and Cons
Refinancing a car loan can be a smart move in some situations. Carefully consider your personal circumstances and goals, compare rates from several lenders and do the math to make the decision that’s right for you.
