You can refinance a car loan like a mortgage. Refinancing is an option when a lender agrees to renew your loan that could work in your favour in form of lower interest rate, reduced monthly payments or any other benefits.
It typically happens when your credit score improves that enables you to avail yourself of lower interest rates and current interest rates revise. There are various benefits and risks associated with refinancing your car.
The lender will review your credit report before proposing any deal to you. Your credit score will help them decide interest rates, term and monthly payments of the loan. You will use this money to pay off the previous car loan and begin to make payments as per the new plan.
Benefits of refinancing a car loan
- Makes the debt cheaper
Refinancing is an ideal choice when your credit score has improved. It can allow you to get a new loan at lower interest rates.
If you have already taken on car finance in Ireland for bad credit people, you can apply for a loan with lower interest rate after an improved credit rating.
- Smaller repayment length
Refinancing can help you avail yourself of small repayment term. If the term of the loan is longer, you can enjoy small monthly payments, but the total cost of the loan will be much more than you imagined.
Risks of refinancing a car loan
- Early repayment fees
If you decide to refinance your auto loan, you will have to pay off the whole of the current debt. Since you are paying it off before the due date, you will have to pay early repayment fees.
Make sure that the new loan will still save you money. If you find that after paying prepayment penalty your new loan does not save you any pennies, you should drop the idea of refinancing.
- Increased interest
Although the goal of refinancing is to help you save money on loan repayments, sometimes it can cost you much more than otherwise you would have paid off.
The longer repayment term can increase the total cost of the debt even though your monthly payments are reduced.
Though it is associated with risks, there are still some reasons that should not hold you back from refinancing.
You can secure better interest rates
If you have taken on a car loan with a bad credit, you will be paying high interest rate. The term of car loans generally extends up to 36 months.
It can be hard to stick to payments for such a long period especially when your financial situation changes due to unexpected reasons.
This is why it is suggested to refinance your car loan as your credit score improves. With the help of refinancing you will be able to get a new loan at reduced interest rate, which means your monthly payments will become smaller and much more manageable.
However, you will likely get a repayment term a bit longer. Some lenders can put you on a longer repayment length to make profits.
Try to choose a deal with smaller length so you do not end up paying more as a total cost of the debt.
More manageable monthly payments
Bad credit score means you will get the deal at high interest rate. However, high debt-to-income ratio is also responsible for getting an auto loan at a high interest rate even if your credit score is not poor.
Being unable to manage such a car loan can damage your credit score very badly lowering down the chances of getting a loan at competitive interest rates down the road.
Refinancing your car loan can extend the lifetime of your debt and hence your monthly payments will be much smaller. However, it is worth noting that you will end up paying more because the interest compounds over time.
Defaulting on a loan will result in much more damage, so if you think that it being difficult to keep up with repayments, you should refinance your car loan.
If you are looking to refinance your car, make sure that it enables you to save some money. Do research before you opt for refinancing.
You should calculate the best time for it so you do not end up paying very high prepayment penalty. Try to get a more flexible interest rates and monthly payments when you refinance your auto loan.
Refinancing can be a bad idea when you do it when you are close to the final repayment of your current debt, you have already taken on a debt more than the worth of the car, and your car has a significant depreciation.