Refinance My Car: Pros and Cons

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, - January 9, 2014

If the interest rate you currently pay on your auto loan is higher than you think it should be, ask yourself: Can I refinance my car for a better rate? Car refinance has advantages and disadvantages depending on the state of your loan, your interest rate and your credit score. However, you should definitely look into the pros and cons of auto refinance to learn as much as you can about it, for it might be the right option for you.

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Pros of Car Refinance

Upon purchasing your vehicle, you probably took out a loan to cover the bulk of the expense. The interest rate you received at the time, for various reasons, might have been higher than you deserved. Maybe not, but if you've made regular payments on time for a number of years, you are probably eligible for a lower rate. Interest rates on car loans fluctuate according to market conditions, and when they're low, if your credit is good, you should be able to refinance your auto loan to get a lower rate.

Car refinance is essentially trading in your current auto loan for a new loan with a better rate. Depending on how much lower a rate you receive, it could potentially save you thousands of dollars in interest charges. Even a 1% drop will save you at least $500 over the life of your loan. Car loan refinance can also help you out from month to month, reducing your car loan payment and giving you some additional breathing room.

If you have equity on the car--meaning you owe less than it is worth--you may end up with some cash when you refinance. The refinancing lender loans you the amount that the car is worth, you pay off your old loan and get to keep the difference while maintaining a new monthly refinance payment.

Cons of Car Refinance

Negative equity is the opposite of equity, meaning you owe more than the car is worth. If this is the case, car refinance might not be an option. If you owe more than the car is worth, a refinancing agent has no incentive to work out a new loan, for if you were to default, they would be stuck with a car worth less than the money they lent.

If you have only paid on your loan for a short time, chances are you haven't been paying on principal--only interest. This means, if you refinance, you will basically be starting over, only with a new loan to cover the same amount you borrowed before, so there is no benefit. Another disadvantage of refinance has to do with credit scores. The process of approval is more stringent for refinance than for the initial purchase. If you have poor credit, you are less likely to be approved for refinance. When you refinance, expect to pay additional fees to the new lender who charges you for their service. This is not necessarily unfair or a bad thing, but it needs to be considered.

Car refinance is a possibility if your credit score is good to excellent and if you have equity in your car. It can save you hundreds, if not thousands over the life of your loan and reduce your monthly car payment. Unfortunately, it is not possible for every borrower. However, it is worth looking into because there are enough advantages to make it an attractive option.

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Related Questions and Answers

Is Car Refinancing Your Best Option for Bad Credit?

If you are thinking of car refinancing for bad credit due to the high credit rate you are paying because of bad debts, it can be your best option. Dealers aren't doing you favors when they get a loan done at 17 percent for 72 months on a $15,000 car. This adds about $6,300 to the price of the car. It puts your car payment at $421 per month. If you obtain a loan at 8 percent, your monthly payment drops to $308. It is like finding $113 per month in your pocket. Once the first loan has been lent, your credit rating, while it may affect the refinance a bit, won't have a great affect at all.

What's the Best Way to Prevent Negative Equity Car Loans?

The only way to prevent negative equity car loans is by paying cash and negotiating price, based on that cash. When you have finished the negotiation, pay that cash price and you will have no loan. Once you have a loan, you have negative equity. Negative equity means you owe more on your loan than the car is worth. It is a situation that most car owners find themselves in. For example, a car owner may owe $12,225 on a loan and the book value of the car may be $8,225. Your negative equity is $4,000 because the loan is $4,000 more than the car's value. To put it another way, you are $4,000 "upside-down".


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