Why should you refinance car loan?
Are you contemplating on refinancing your car loan? Possibly you are already thinking about how rigorous it was for you when you applied for your existing car loan. You are already scared of starting and going through the process again. Well, the good news is that, it is easier to refinance car loan than you might ever imagine than to get new car loan. But before you jump into the conclusion that it is time to refinance your auto loan, it is important you understand certain circumstances which may necessitate anyone to refinance car loan.
What does it mean to refinance car loan?
Some people have this misconception that when you refinance car loan, you are adding new loan to the existing one. That is absolutely not what car loan refinancing is all about. Let me explain the meaning in a layman language. To refinance car loan means that you are taking a new car loan to cancel the existing car loan. That is, a new lender is helping you pay off your existing car loan balance so that the loan can be transferred to him. If the deal is successful, you will owe the new lender and not the old lender any more. Henceforth, your monthly repayment will be made to the new lender under a new agreement.
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Why should I refinance car loan?
People do refinance car loan for different reasons. The commonest reasons for car loan refinancing include the following:
Lower Interest Rates
It is possible that you got your car loan at a very high interest rate. At the point of purchase of your car, you might make a mistake of not shopping around in order to compare offers from different dealers or financial institutions. You just jumped into the offer that came your way. In this type of situation, the offer would seem to you as the best deal you could ever get. You could even be beclouded from making objective decision because you just wanted to get the car at all costs at that particular time. Now, riding a car is no longer as excited as it used to be when you just bought the car. The reality has set in and you are more exposed about better options you would have used to finance the car. Now, you have discovered that you can actually get a deal at a better interest rate. However, you are having an existing loan which you are still servicing. In this type of situation, it may be good to consider car refinancing as an option. For instance, if you are currently paying eight per cent interest rate on your car loan and you have a new offer for just four per cent interest rate, it makes sense to refinance your car loan.
Another factor which may impact on the interest rate is your credit score. If you review your credit score and you observed that it has improved dramatically, it may be a good opportunity to refinance car loan. Credit score is a vital factor that any lender will look at when deciding on the interest rate that will apply to your loan. As at the time you are getting your car loan, it is possible you still had record of late payments hanging in your credit report. This must have definitely affected your credit score. Now after a year, the late payments are now more than seven years making it to drop off your credit report. Coupled with your consistent monthly payments of your car loan in the past one year, it is possible that you have a better credit score now. This will definitely earn you some credibility in term of your creditworthiness. Therefore, you might be able to negotiate for a better interest rate if you opt for car refinancing. But there is something you should put into consideration here. If your loan has a clause for early repayment penalty, you need to weigh the costs of this early repayment fee with the savings you want to make from the interest payment.
Reduced Monthly Payments
If you are currently making monthly repayment on your car loan and this is putting too much pressure on your finance, car refinancing may be a way out of this predicament. The monthly payment may become difficult to pay as a result of your increased responsibility. For instance, you might have assumed you would be able to meet the monthly repayment amount conveniently based on your spending as at the time you were taking the loan. Now, you have to pay for costs of fuelling and repairs of the car. In addition, you are now having a new baby. All these have added to your expenses. This may require that you seek for a way of reducing your monthly payments on the auto loan. On the other hand, your expenses may not increase significantly. IT might be that your income has dropped from what it used to be to a lower amount. And this has made find it difficult for you to meet your monthly payments. This situation can cause you to start making late payments or cause you to miss payments. This will not help your credit report. For this reason, you may resort to car refinancing. This will allow you to stretch the payment of your remaining balance over a longer period thereby resulting into lower repayment amount every month. If you succeed in refinancing the car loan with lower interest rate, it is possible to achieve reduced monthly payments without necessarily extending the length of the loan.
Addition or Removal of Co-Signer
It is not unlikely that somebody co-signed your car loan when you applied for it. Financial institutions or lenders may request that somebody co-sign your loan if you don’t have enough credit history or credit score that qualifies you for the loan. The essence of having someone co-signed your loan is to ensure that the lender will be able to secure his money in case of any default on the part of the loan beneficiary. For example, if you obtain a loan with someone co-signed for you, the implication is that the person will be held liable for the repayment of the loan in case you are unable to pay back. If the person is no longer willing to play that role, you may seek for car refinancing. On the other hand, if you don’t have a co-signor on the existing loan, you may want to add a person to co-sign for you so that you can enjoy lower interest rate.
People can refinance car loan as a result of any of those reasons. But whatever may be your reason to refinance car loan, the possible outcome should result in either reduced cost or better liquidity or both.
How to Refinance Car Loan
Now that you know why people can choose to refinance car loan, let’s look at the steps involved in car refinancing.
Assess your current situation
If you want to refinance car loan, the first place to begin is to assess your situation first. You need to ascertain your car loan balance and the length of time you still have ahead of you to pay the balance. If the remaining time is very short, it may not be necessary again to refinance the car loan. Also, with the short repayment period, it is likely that the value of your car has grossly diminished. This may make it difficult to find any lender who may be interesting in refinancing such car as the car will be used for the collateral of the loan. The time to refinance a car may be a good time to read through the loan agreement again in order to ensure you actually understand the terms. It is possible that the loan agreement contains a clause that will make early repayment not feasible. If the early repayment fee is quite high, you may not even bother yourself to consider car refinancing as an option. Auto loan refinancing is only good when the benefits exceed the costs. In fact, the main reason people refinance car loan is to save some costs.
Having established the outstanding loan amount and there is no restriction for early repayment, you can find out information about your credit score. You are entitled to one free credit report every year from the three consumer credit reporting agencies namely Equifax, Experian and TransUnion. You can get the free credit report through Annualcreditreport.com. Annualcreditreport.com is the only source authorised by Federal law in U.S. for your free credit reports. If your credit score has improved substantially, you may be good for car refinancing.
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There are many lenders that offer auto loan refinancing services. They can help you achieve your aim. With the help of internet, you may not need to do a lot of leg works. Just connect to the internet and search for “car loan refinancing companies”. You can even use some variations such as “auto loan refinancing companies” or “companies that refinance car loan”. To be sure that you find the ones that are within your region, you can even refine your searches further by being more specific by searching for “car refinancing companies in your area”. You will be surprised at the number of such companies they will pop up. You can then visit their websites and call their customer service for more information. With information you gather in this process, you will be able to screen the number down to the ones you think will meet your needs. However, refinancing a car may not necessarily mean that you are changing your lender. The first place to start may be to discuss and renegotiate with your existing lender. By the time you compare different offers you received from other car refinancing companies with that of your lender, you will be able to decide on which one will be more beneficial to you. If you and your new lender agree on the terms, you can then seal the deal.
Contact your existing lender
You need to quickly communicate your decision to refinance your car loan to your existing lender. Ensure that you pay off the entire outstanding balance on the loan. Of course, your new lender will give you a cheque that will cover the outstanding balance on your car loan. It is better to take this cheque by hand to your existing lender in order to avoid any delay in transit. This will prevent you from making late payment which may attract another penalty, fee and interest. When the payment is settled, you can have a sigh of relief
Ensure timely payments
With the new car refinancing arrangement, it should not be difficult for you to make your monthly payment. Ensure you stick to the payment terms. This will help you in building good credit score. Don’t forget that late payments can hurt your credit score. Therefore, you should do everything to ensure you don’t make any default.