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There are plenty of reasons someone may want to refinance an auto loan. Most involve changing the length of your term, reducing your monthly payment, or adding or removing a person from the loan. Whatever your motivation may be, it is important to note that everyone’s financial situation is unique. This article will help you understand the potential outcomes and considerations of refinancing to help you decide if it’s right for you.
How Does Auto Refinancing Work?
Refinancing a car loan involves taking on a new loan to pay off the balance of your existing car loan. It’s pretty simple. You trade in your current vehicle, the dealership gives you a trade value and pays that toward your current loan. Whatever remaining balance you have is then added to your new vehicle loan. People generally refinance their auto loans to save money, as refinancing could score you a lower interest rate. As a result, it could decrease your monthly payments and free up cash for other financial obligations.
Can You Refinance With Bad Credit?
Refinancing your car with bad credit can make financial sense, under the right conditions. A bad credit auto refinance can free up a significant amount of money or save money on future payments. You can lower your interest rate, reduce monthly payments, and extend the term of the loan. If you were making timely payments with the previous auto loan or recently increased your credit score, you could qualify for a lower interest rate and even get a loan with a prime lender that you did not qualify with when you took out your initial loan!
Is it Difficult to Refinance an Auto Loan?
Absolutely not! Lenders typically see a good credit score as a sign of a less risky borrower, which in turn can lead to offering better interest rates. If your credit score has improved since you took out the loan, you might be able to save money on interest through a refinance. If you have some credit issues, refinancing is still an option. Consult with a credit manager from a trusted dealer or someone from your bank to get information specific to your financial situation.
Is it Worth it to Refinance a Car?
There are many good reasons to consider refinancing. One of the most popular is getting a better interest rate on your loan. But there are other ways refinancing can be worth it for you as well:
- Refinance without paying more for your car.
- Add extra time to your payoff period with new loan terms.
- Use a down payment to lower your debt.
- Add or remove someone from your loan.
- Buy a new vehicle and use your trade-in to lower your loan.
Auto refinancing has many potential benefits, but there are other perks as well. When bundling your loans together you can often have other financial products, such as GAP protection, added to your new loan.
Why is GAP Insurance Important For Certain Loans?
In the event of a total loss, or write-off, the insurance company only pays the actual cash value of the vehicle. Guaranteed Asset Protection, commonly known as GAP insurance, makes up the difference between the actual cash value of the automobile and the amount still owed to the finance company. Any time the auto loan amount exceeds the value of the vehicle it is advisable to purchase GAP insurance. Right from the start, most loans will carry a higher balance as soon as you drive the car off the lot. This is especially the case for higher interest loans and cars that depreciate more quickly. In the event of a total loss of your vehicle, GAP insurance will protect you from having to carry over the debt of two vehicles into a third vehicle loan.
As you can see, there are plenty of factors to take into consideration when it comes to auto refinancing. By having a good understanding of your financial situation and your vehicle needs, you should be able to make an informed decision on whether it is the right choice for you.
This article was contributed by Clutch, Canada’s first online dealership.
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