Refinancing an auto loan provides you the ability to make owning your vehicle a bit more affordable.
Most cars and trucks have a significant amount of value regardless of age, so you may be able to take advantage of its value to secure a loan. Additionally, a secure loan like an auto refinance may be more affordable than other forms of credit.
Sure, refinancing an auto loan means you pay interest and get a new term, but there are instances in which this can work in your favor and be well worth the investment.
7 Benefits of Refinancing an Auto Loan
1. Lower Current Interest Rate
Some people get stuck in vehicle loans with higher interest rates at the start.
For example, if you had a low credit score when purchasing the car, but have since improved your score, it’s likely refinancing an auto loan will help you secure a lower rate.
If you are paying at least one or more percentage points higher than you could get by refinancing an auto loan, it may be the perfect time to consider it. In the long term, a lower interest rate could save you money on the purchase of the vehicle.
2. Reduce Monthly Payment
In some situations, refinancing can help you lower your monthly payment.
For example, you may be able to extend the terms by refinancing an auto loan, therefore reducing the monthly payment.
Extending the loan term may increase the amount of time you have to repay your debt which consequently increases the amount of interest applied. You may pay more in the long run as a result. However, if you need to lower your payment, this may be a good option for you.
3. Improve Your Credit
Your credit is another reason to refinance an auto loan.
For example, your existing loan may have a few missing payments, or you may be struggling to make payments on time. Refinancing an auto loan allows you to pay off the first loan in full, then secure a new loan.
This offers a fresh start. The late payments you made on your other loans remain in place on your credit for a few years, but making payments on time with your new loan is highly beneficial.
4. Tap Into Extra Equity
In some situations, your car can become a powerful asset for you.
This happens if you use your car as collateral for a debt consolidation loan. The lender will cut you a check which you can use to pay off other debt, such as credit cards or personal loans.
With the vehicle in place, you are likely to get a lower interest rate than if you kept paying on your loans with minimum payments. Refinancing an auto loan to include other debt like this is usually only possible if you have enough equity built up in the vehicle. Your lender can help you determine if this is the case.
5. Pay Off Your Loan Faster
What if you could pay off your loan faster? This could mean you end up paying less overall to purchase the car.
With a lower rate through refinancing an auto loan, you may have more money each month to put towards paying off your debt. This may allow you to pay off your car sooner.
Be sure the auto loan refinance does not put an early payoff penalty in place. This makes it difficult for you to pay off your loan early.
6. Free Up More Cash Flow
Sometimes, the best reason to refinance an auto loan is simply that you need a lower payment to increase the amount of cash on hand you have for your personal budget or savings.
Refinancing an auto loan for a longer term extends the amount of time you need to pay, but it also works to reduce your monthly payment. This can give you a surplus in the budget each month. You may be able to use these extra funds to pay down other debt, build a savings account, or reduce your overall debts otherwise.
7. Get a New Lender
Some consumers benefit from obtaining an affordable auto loan refinance just because they want to get out from under a lender they do not like.
For example, if you purchased a car through an auto dealership and that dealership is hard to work with, charges numerous fees, or is otherwise limiting to you this may be an ideal opportunity to refinance.
Deciding to Refinance an Auto Loan
Refinancing a car loan offers you many benefits. However, it is important to choose a lender you can trust and compare quotes to ensure you get the best possible rate.