The Pros and Cons of Refinancing a Car Loan
Have you taken out a car loan that’s no longer working for you? You can get out of it by refinancing.
Just like everyone else, your circumstances are constantly changing so you may decide to refinance a car loan at some stage. Maybe your existing loan no longer fits your needs, or you want to take advantage of another opportunity elsewhere.
In any case, you should consider the pros and cons of refinancing a car loan before making a decision.
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Pros |
Cons |
|---|---|
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A lower rate could save you money |
The interest rate may be higher |
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Faster repayment |
Interest costs are larger |
|
Reduce payments and extend your loan |
Transfer, exit and upfront fees |
|
Improved cash flow |
|
|
Improve loan features |
|
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A more accessible lender |
Pros of refinancing a car loan
Lower interest rates
Most people are drawn to the appeal of lower rates which reduce interest expenses and the total cost of the loan.
Lenders adjust their interest rates to refine their own margins. Once you decide when to refinance your car loan, you may realise your existing rate is no longer competitive.
If you’ve already begun making repayments, your credit score will have changed. A better credit score can help you refinance your car loan at a lower interest rate and make repayment faster.
Reduce payments and extend your loan
Not every situation calls for a solution resulting in the loan being settled as soon as possible. For example, when those unforeseen events and costs always manage to come up at the worst time. Whether it be a stint in hospital, mounting bills, or a visit from distant family.
In such instances, if you refinance a car loan you can reduce payments by extending the loan term. Instead of making repayment across five years, you may opt to extend this to six years – allowing more headroom for those sudden expenses.
This flexibility is another pro of refinancing a car loan. Remember that the interest rate at which you refinance the loan could be higher and the total loan will cost more.
Improved cash flow
There may also be other cash flow benefits after you decide to refinance your car loan. This is typically attainable when you have reduced the balance on your loan to less than the vehicle’s market value.
At this point, if you refinance your car loan for a value greater than the remaining balance, or consider trading in your old car for a new one, you may be able to access improved cash flow.
If desired, you can also amend the final balloon payment on your car. By doing this, you can manage your cash flow to better match your needs now and in the future.
A more accessible lender
Finally, some motorists may also view a new relationship with a different lender among the pros of refinancing a car loan.
Not all lenders provide the same level of service or flexibility with regards to payments. One lender may charge you for paying off your loan early, whereas another may not. As such, switching lenders could offer tangible and intangible benefits.
Cons of refinancing a car loan
Higher interest rates
The typical incentive to refinance a car loan is to get lower interest rates. However, this is not always guaranteed. In fact, refinancing can lead to higher interest rates, particularly for older vehicles, and increase the total cost of the loan over the term.
Larger interest costs
The other situation where your loan cost will be dearer is that when you refinance a car loan and extend the term. Even if the interest rate is reduced by a small amount, the longer term means that the total interest paid will be greater.
It is for this reason that you should always exercise caution if you decide to refinance your car loan by extending the term.
Refinancing fees
Last but not least, some lenders impose any combination of transfer, exit, and upfront fees when you refinance a car loan.
These costs should always be taken into account as they may skew the balance between the pros and cons of refinancing a car loan. The fees may ultimately make the transfer more expensive, even if lower interest rates and reduced payments are available.
Final thoughts
If you decide to refinance your car loan, always conduct thorough due diligence and consider the pros and cons of refinancing a car loan.
Look for a solution that gives you a balanced outcome for the interest and the overall term. Most importantly, make sure you are not paying a premium, nor rushing into or extending the loan unless absolutely necessary.
For more advice about refinancing your car loan, talk to a Positive Lending specialist on 1300 722 210.
See also:
Guide to Finding the Best Car Finance Deals
Tom Caesar is the Managing Director of The Positive Group, a group of Australian financial services companies offering a broad range of finance to clients Australia wide. The Positive Group assist clients in the areas of car finance, mortgages, insurance & wealth management. Tom has been in car & asset finance for over 10 years. Tom regularly contributes articles on car finance, insurance, technology and business growth, drawing on his experience of starting his own brokerage in 2009.