Refinancing loans is not such an alien phenomenon. Many people refinance their loans for different reasons, such as to improve their credit and allow them access to better terms or even get lower interest rates. Refinancing an auto loan has its advantages and disadvantages, and you have to be keen when signing the loan agreement to avoid unnecessarily high costs.
The Cost of Auto Refinancing
The most common goal of refinancing is to save money on the interest charged against the loan. However, some lenders impose charges that may reduce the net impact of the lower interest rates. Charges such as upfront fees, transfer fees, and exit fees may reduce any savings from refinancing. To establish how much it will cost to refinance car, it is important to examine the following charges.
- Transaction Fee – Either or both the current and new lender may require you to pay a processing fee.
- Registration Fee – In some states, it may be necessary to re-register your car when refinancing, resulting in extra fees.
- Early Termination Fee – In some cases, lenders may charge you for paying off the loan early.
- Late Payment Fee – Lenders may charge you a fee when you are late on the loan repayments. Check to ensure the fees are not too high.
- Title Transfer Fee – In some states, you may have to pay a fee when transferring title from one lender to the other
Pros and Cons of Auto Refinancing
Refinancing a car loan can get you a lower interest rate. That would result in potential cost savings. Refinancing may also help you lower your monthly loan repayments in cases where the payments may be a burden. As per the experts at Lantern by SoFi, “The biggest benefit is the potential cost savings you could get if you refinance at a lower interest rate.”
Despite the benefits, car refinancing also has its drawbacks. First, the lenders may charge fees that may cancel out any gains from lower interest rates. For cases where you negotiate for lower monthly payments, the interest rates may be higher since, for longer repayment periods, lenders charge higher rates.
Considering Refinancing Your Car
As the economy changes, so do interest rates. The fluctuations in interest rates may make refinancing necessary. When interest rates fall below the rate at which you took your car loan, refinancing may result in savings on interest expenses.
Another instance when refinancing would be a good option is when your credit rating improves. An improved credit rating would result in lower interest rates on the new loan.
Shorter repayment periods attract lower interest rates. Thus, refinancing would be great when you want to pay off the loan faster and at lower interest rates.
Refinancing may not always be a great idea. Where the value of the car is lower than the loan, refinancing may not be an option. Similarly, where the car is older than ten years, refinancing may prove challenging. It may also prove challenging to refinance a loan with a small value.
Effects of Refinancing on Credit
Refinancing a car loan has an impact on your credit. Most lenders carry out credit checks to determine the borrower’s financial situation. There may be a small drop in your credit score during refinancing. However, that is temporary and will likely be correct in a year. Making timely payments to offset the loan would help build your credit score.
Information is key in any financial decision. Thus, having all facts would help in making the right decision on refinancing your car loan.