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Auto Loan Refinance – Great Idea or Just Plain Insane?
Open up any auto magazine and you will find hundreds of advertisements for auto loan refinancing. They all direct you to web sites that make refinancing seem irresistible.
Few sites provide information on the pros and cons of auto loan refinance. So we are going to give it a go.
Refinancing of any loan involves obtaining a new source of finance to pay off your existing loan. The same is true to refinance an auto loan. Under current US law the new loan must be from a different loan company.
As there is a cost associated with the early repayment of an existing loan and with taking out a new loan you may question if refinancing can ever be a good deal.
As it happens, there are a number of circumstances in which loan refinancing makes sense} Refinancing offers you the chance to replace a high rate of interest with a lower rate. Typically, if you had a bad credit history when you took out the original loan you would have paid a high rate of history. If you have succeeded in improving your credit rating you may be able to obtain a much better rate of interest. So, if you have several years of payments still to make on the original loan you may be better off exchanging your loan via a refinance agreement.
The other time that refinancing may be appropriate is if you cannot keep up with existing repayments. By refinancing over a longer period you may be able to reduce your monthly repayments.
So what are the drawbacks?
The biggest disadvantage to you is likely to be cost. Most refinance packages are taken out to lower monthly repayments by extending the loan period. While your monthly payments may drop you will pay more overall.
Secondly - refinance loans are only available in specific circumstances. At the time of writing the major conditions were that the value of your car must be higher than the loan and that the outstanding amount owed had to be $7,500 or more. Both of these conditions tend to take refinance packages out of the reach of the less well off - the very people who might benefit most from refinancing.
To come out ahead on a refinance you need to have 4 years left on the loan and you need to be offered at least a 2% improvement on your current loan.
Refinancing to lower repayments by extending the loan may be a fact of life for some. Life doesn’t always run to course. Just remember that those lower repayments can hide the total amount you pay back in the longer term. Of course, you may not have a choice.
