Is Refinancing a Car Loan Cost-effective?
If you’ve ever had a car on finance, you’ll of no doubt heard the word refinance. For many drivers, refinancing a car loan can be an easy way to get better rates on your deal and lower your monthly payments. However, knowing when to refinance a car and how to do it can ensure it’s the right decision for your loan. The guide below looks at how car refinancing works and the benefits and drawbacks of doing so.
What is refinancing?
Refinancing a car simply means replacing your existing loan with a new loan with better terms. You take out a new loan with a new lender and use it to pay off your existing finance deal. You then make monthly payments on your new loan over the agreed period. Refinancing is a good idea if your circumstances have changed since you first took out your loan, for example, you now have a better credit score or interest rates have dropped.
When is it a good idea to refinance your loan?
There are a number of instances when refinancing your car loan would be a good idea. The main purpose of refinancing is to get a new loan with better rates. Your credit score can affect your loan and a better credit score can get you access to lower interest rates. Refinancing can be a good idea if you’re not in a better financial situation since you first bought a car on finance. Refinancing also makes sense if UK interest rates have dropped since your loan was first taken out and you could get a better deal offered.
In terms of time, it is often recommended you wait until your finance agreement has passed the halfway mark or you’ve made at least 50% of the repayments. Refinancing too early may not be cost-effective and it may not give you many financial options.
What are the benefits of refinancing?
- Lower interest rates. One of the main benefits of refinancing your car loan is to get a new deal with a lower interest rate. Higher interest rates mean you pay more money back on your loan so lowering the interest rate helps you to make your deal cheaper.
- Reduce your monthly payments. When you refinance your car loan, you can also choose to shorten or lengthen your loan term. By choosing a longer loan term, you can reduce your monthly payments. However, it may mean you pay interest for longer.
- Refinance a balloon payment. You can also use it to refinance a balloon payment on a PCP deal. PCP balloon payments tend to be quite large, especially on brand new cars but if you want to keep the car you’ve been driving you can refinance the balloon payment.
What are the drawbacks of financing a car?
- You might not get a better deal. Refinancing a car loan doesn’t mean you will be guaranteed a better loan. External factors such as UK interest rates, your credit score, and the deals which are on offer can affect refinancing terms at that moment in time.
- You may pay more. If you use a refinance deal to lengthen the loan term, it can reduce your monthly payments but it means you pay interest for longer and could make your finance deal more expensive overall.
It can impact your credit score. If you fail to keep up with the payments on your new refinance loan, it can have a massive impact on your credit score. A bad credit score can then make it much harder to be able to borrow in the future.
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