Why should I refinance my car?
If you are considering refinancing your car, you must already have some idea that refinancing can have benefits for you. What are those benefits? Most people refinance because they want to save money, but saving money on a car loan can mean a couple different things. Other people have more personal reasons to refinance, yet they may be confused how to find a loan that fits their personal needs. At Innovative Funding Services (IFS), we find that most refinance customer’s reasons for refinancing fall into at least one of three categories, all of which are legitimate reasons to refinance. Let’s look at each.
Lower Your Monthly Car Payments
One of the most common reasons people refinance their cars is to lower their monthly car loan payments. This goal makes sense for almost anyone, because monthly car payments affect most household’s monthly budgets. However, if you apply to refinance, you should realize that a lender can change two factors to reduce your monthly payments, one of which may or may not be in your best interests.
When you refinance, a lender issues you a new loan to pay off your old loan, and your new loan will have different loan terms than your old one. If you want to lower your monthly payments, you can change two loan terms to accomplish this goal, your interest rate and/or your loan term length.
A lower interest rate is always a good thing, because until your loan is paid back, you have to pay your lender interest on the loan balance you still have outstanding. So, the lower your interest rate, the less interest charges you will pay (assuming your loan term length does not change).
It is your new loan term length that requires more consideration on your part to see if it will fit your needs. If your new loan extends the number of months over which you pay for your car, your payments will be lower (assuming your interest rate is not higher than before refinancing or you do not finance too many additional costs into your new loan). Again, lower payments are a good thing. However, because of the way car loan interest works, the more months over which you pay for your car, the more interest charges you pay for with your payments. The point you should take away from this concept is that if you extend your loan term, you may pay more for your car cumulatively over the term length of your loan. Still, it is possible to extend your loan term and pay less for your car by refinancing to a sufficiently lower interest rate.
For example, let’s say you took out a loan one year ago for $20,000 at 6% interest rate for a loan length of 48 months. Your monthly payments on this loan would be $469.70 (you can calculate this payment for yourself with an auto loan calculator). After 12 months of payments, you decide to refinance your loan. If you simply lower your interest rate to, say, 3%, but do not extend your loan term, your new payments would be $449.01. While the payments are not much lower, you will pay less for your car in the end.
Now, let’s say instead of lowering your interest rate, you simply extend your loan term by 12 months. In this case, your new payments would be $362.61. These payments are over $100 less than your previous loan’s payments; however, in the end you will pay more for your car because you will pay more interest charges.
Neither of these scenarios may sound that beneficial. But let’s say your auto loan service company matches you with a lender that will refinance your loan such that you lower your interest rate to 3% AND extend your loan term by 12 months. For this new loan, your new payments would be $341.75 (versus $469.70 originally) and you would save over $500 in interest charges over the course of your loan! This case illustrates the potentially huge benefits of refinancing a car loan.
Reduce Your Interest Rate
While many refinance customers are principally concerned with their car loan payments, some are more concerned with how much they will pay for their cars in total. As the example above illustrates, monthly payments do not tell the whole story when you consider how much you pay for your car. If you are paying a high interest rate over a long loan term, you may have low monthly payments, but you will end up paying a great deal of money for your car by the end of your loan. For this reason, many refinance customers seek to refinance their car loans to reduce their interest rates. A lower interest rate means lower interest charges per month, which in turn means that a larger portion of your monthly payments go towards paying your car loan principal (i.e. how much you borrowed) and less goes towards paying interest to your lender.
Remove (or Add) Someone as a Co-signer
The reasons for refinancing discussed above should not lead you to believe that the only reasons to refinance are related to saving money. Sometimes, a person may have more personal reasons to refinance, such as removing someone from his/her car loan. For instance, when a relationship comes to an end, a person may want to remove his/her ex-partner from his/her car loan. No matter your reason for refinancing, it is important to find the right loan that fits your personal needs.
At IFS, we understand that everyone has a story, which is why our Finance Advisers take the time to listen to every customer’s reasons for refinancing. If you are looking to refinance your car loan, apply today. We will assign to you a dedicated Finance Adviser who will work with you to find you a better car loan.