When does car refinancing make sense? The pros and cons

Car refinancing has been around for many years. But to this day, many people still don’t understand it, even when they find themselves with a refinance loan to pay off.

05/12/2019

Car refinancing has been around for many years. But to this day, many people still don’t understand it, even when they find themselves with a refinance loan to pay off.

For many people, when they hear the term refinancing, they immediately associate it with bad debt. But that doesn’t necessarily have to be the case. The truth is, car refinancing has both negative and positive implications, and it is important to understand both. When you are looking for vehicle finance, and you’re considering applying for refinancing, you need to know a few terminologies. This will help you make informed decisions in a meeting.

● Balloon payment: this method of payment can lower your car’s monthly instalments. A balloon payment is when you agree to pay a large sum of the loan amount once your car loan term has ended. People often opt for this method of payment when they want a lower monthly instalment on an expensive vehicle.

● Refinancing: this is when you apply for an additional loan to settle an existing amount. This is normally done by someone with an outstanding balloon payment.

● Trade-in: this is a payment method which refers to trading in your vehicle and using the money you get to pay off your balloon payment or refinance your new vehicle.

● Once-off payment: a once-off payment is when you pay the full outstanding balance in one payment, meaning that you do not need to consider refinancing as an option.

Among these options, many people prefer to refinance their vehicle. So, if you have auto finance and you are considering a refinance term, here’s when it makes sense:

The pros of refinancing

When you’re searching for a lower interest rate

One of the reasons refinancing has become so popular when getting auto finance for your car is because you’re able to get a lower interest rate. Refinancing is most beneficial for those who had a bad or low credit score in the past but have managed to improve it.

If you’ve ever experienced a low or bad credit score, you might have been seen as a high-risk borrower. A high-risk borrower is someone who is more likely to make a default payment on their car instalment. This may have been the case when you were applying for financing before. But now that you have improved your score and have stuck to your monthly repayments, you might end up getting a lower interest rate the second time around.

If you are struggling with your debt

There might come a time when you’re in debt.

Be it too many credit and store card bills to pay or an unforeseen emergency expense; you might be struggling to make ends meet. But refinancing your car can help you during this challenging time. Since refinancing is a new loan agreement with your authorised financial service provider, you may get a new term with a lower monthly instalment. This can give you a bit of leeway with your finances, making it easier for you to pay all your outstanding debt.

As mentioned previously, you might end up paying a lower interest rate, which will allow you to settle your outstanding balance at an earlier stage. Refinancing is a great way of managing your debt when you find yourself in a financial crisis and need a helping hand.

Refinancing can correct your upside-down car loan

The upside-down loan is a common term among car owners. An upside-down loan is when your current loan value is greater than your car’s actual value to date. This simply means you have negative equity. An upside-down loan can be caused by many reasons.

A few of those reasons include not having a deposit when purchasing the vehicle or your payment terms are too broad. When your payment term is too long, you accumulate more interest adding more money to your outstanding balance. If you are in this boat, then car refinancing can be extremely beneficial to you. Refinancing allows you to take out an additional loan to cover your existing loan, helping you correct your upside-down loan status.

The cons of refinancing

It can become more expensive

Although there are a few benefits with refinancing, you can also experience a few disadvantages. For instance, you may get a car refinancing term that has a higher interest rate. It isn’t guaranteed that when you apply for refinancing you will always get a lower interest. Therefore, it is in your best interest to find out from the lender beforehand what your interest rate may be, even if it’s just a guideline. You can also use a vehicle loan calculator to make sure you are making an informed decision before you go into another loan agreement.

It may negatively impact your credit score

Applying for refinancing can lower your score in three ways:

● Potential hard inquiry: when applying for additional funding, lenders will have to make an inquiry on your account. The lender will check your credit report and score before they decide whether they can approve you for the loan or not causing. However, if you do get selected for financing, the small drop on your credit score will be insignificant once you start making your monthly repayments.

● Applying to multiple lenders: this can be a problem as you may have too many inquiries on your report, which can make you seem desperate to lenders. However, it is clear that you are looking for the best deal, and often, credit bureaus understand that. But you have to make sure you apply within a short period as this will show them that you were looking for a loan that suits your budget. However, if it’s months apart, it will seem as if you are in desperate need of financing.

● A closed account: this can affect your credit score. In essence, it lowers your credit score because you are closing a long-standing account. However, if your payment history is good, it might not have a huge impact on your credit score.

While refinancing can harm your credit score, you need to keep in mind that should you get a new loan, you will be paying for it monthly. That agreement will help to boost your credit score right back up, depending on how well you stick to your contractual agreement.

When does car refinancing make sense

Choosing whether to apply for car refinancing is never easy, especially when you think of the disadvantages. But, if you have good reasons as to why you need to refinance, then it can be helpful to your current situation. If you need to save money because you had an emergency or have too many accounts to pay off, then refinancing will help you out.

And if your credit score has improved, it makes sense as you can get a lower interest rate loan and save money in the long run. If; however, you do not have a valid reason or there are no benefits to reap, it would be best for you to stay away from refinancing. This process is supposed to make your life easier, so choose the best option for you and your finances.

 

 

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