If you purchased a newer car and it’s in good shape, refinancing your car loan for longer terms can be a good choice. Additionally, you may have done some work on your credit score and found better terms with a new bank. Finally, you may have found a sale on great interest rates at a new bank or credit union.
When you should refinance your car loan
If you needed a co-signer when you bought your current vehicle, you might be able to refinance the car in your name only. This can reduce worries for your co-signer and give you more independence.
Refinancing your car is also a good idea if you have more months than money on a regular basis. If you’ve paid for two years and have brought the principal down on loan, refinancing again to a five-year term can lower the payment. It will mean that you have to carry full coverage insurance for longer, but that may be worth it to have a lower payment for the next five years.
When you shouldn’t refinance your car loan
If your car is nearly paid off, be aware that loan initiation fees may quickly eat up any benefits you gain from a refinance. If you can keep slogging it out for a year or less, you’ll probably come out ahead to keep going on your current loan.
Cars, especially new cars, depreciate rapidly. If you bought new and have put a lot of miles on it, a refinance may not be possible. Be aware that a new car loan can have an impact on your credit in the short term that may not be helpful; the combination of a new loan (the refinance) and a closed loan account (the former loan) can take points off the top of your credit rating.
Personal feelings and impressions can also have a bearing on a car loan. If you love the car but hate your lender, you may wind up resenting the car. Any problems that crop up could lead to grim feelings about the car overall. Hating your lender can reduce your stress level.
Is refinancing worth it?
According to Lantern by SoFi, “refinancing for the right reasons can be completely worth it”. If you can extend the terms of a car loan, you may be able to
- tackle higher interest debt
- build emergency savings
- put more on the principal of a home loan
That said, it is critical that you have a plan in place for these extra monies. For example, you may be interested in starting a business or investing in a side hustle. Don’t risk your car. You can gain big benefits from refinancing a car loan with Lantern. Go ahead and focus on emergency savings. Save up to start your business and wait until the vehicle is paid off to launch your next project.
Refinancing a car can free up cash each month. With these savings, you can protect yourself from big financial jolts in the future or put more money against higher interest debt.
