Refinance a Car: Benefits and Disadvantages

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, - December 4, 2013

When it's time to refinance a car loan, there are many aspects about car refinancing that you should know. You should be aware of the benefits refinancing may offer you, as well as the potential disadvantages of refinancing your current auto loan. There are indeed times that refinancing your current car loan may be a good idea; however, there are some car loans that should be left alone.

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Benefits of Refinancing an Auto Loan

Many people can enjoy more flexible payment terms when refinancing an auto loan. For instance, if you purchased a new vehicle under particularly short-term loan (say two or three years), you may find that the payments are somewhat expensive or burdensome. Under these circumstances, refinancing your auto loan and may allow you to reduce the amount of your monthly payments.

Also, if you purchased your vehicle at a time when you were experiencing credit problems, or you had little or no credit at the time, and you have been making timely payments on the vehicle, then refinancing your auto loan may result in additional interest rate savings.

Moreover, if you're trapped in a particularly evil lease, then a refinancing the lease may be a way for you to escape. You may use a refinance loan to actually buy out the lease and make your payments to the lender instead of the leasing company. Furthermore, at the end of the payment cycle you will actually own the car.

Disadvantages of Refinancing a Car Loan

While refinancing a car loan will often allow you to extend the term of your auto loan, many times refinance loans do so at the cost of a higher interest rate. Even if the interest rate is not higher, you may very well end up paying much more in interest charges because of the longer length of the term.

Therefore, if you can manage the higher monthly payments that a short-term loan requires, then you should try to do so. Paying off a loan in only two or three years is always a good idea if you can do it.

Also, you will need to consider how your present car loan is structured. There are loans that call for fairly stiff prepayment penalties, and these penalties may negate any savings in an interest rate reduction that you may receive.

Furthermore, whenever you refinance your loan, you're simply extending the time for which you'll need to make payments on your automobile. You might run the risk of actually owing more on the vehicle than it's worth. Should this occur, you may have trouble recouping your investment when it comes time to trade in the vehicle or sell it.

Refinancing a vehicle is a great option in some circumstances; however, refinancing is not for everyone and should not be rushed into without a lot of thought and planning. Refinancing allows you to restructure your loans and have better control over them.

However, it does extend the period for which you will be obligated to pay for the car. It is always best to pay off the vehicle as soon as possible. Paying off a vehicle means that you have 100% equity in any trade-in or sale. Besides, being without a monthly car payment is always a good thing.

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