Refinancing auto loans: FAQs

What are the advantages of getting refinancing an auto loan?

Refinancing auto loans - FAQs
What are the advantages of refinancing an auto loan?

· Getting a lower interest rate, especially if you can cut it down by two percentage points or more, and saving money in the long run. Relief from large monthly repayments by extending the term of a refinancing auto loan beyond that of the previous loan Could help to improve your credit score.

What are the disadvantages of refinancing an auto loan?

· An extended loan payment term could get in the way of buying a new car in the future.
· Some extended loan payments only cover the interest which means your monthly payments will not be contributing much to the principal amount. This could lead to a large balloon payment at the end of the loan term. These are fairly rare but they do still occur.
· Borrowers with bad credit may end up refinancing an auto loan for a longer loan term but that still has a high interest rate and high monthly payments. This could may not be worth it as it may not save you much money at all.
· Beware of ‘precomputed’ loans from dealerships as in many cases a lender could assign most of the payments you have already made to interest meaning that you would still need to payoff a large sum on the principal amount.

When is refinancing an auto loan not worth the effort?

• When reducing the interest rate by only a few points won’t make any real difference to your finances.
• Your current loan has a prepayment penalty charge that would cancel out any savings you could have made with the new loan.
• If the new loan has a high interest rate in the double-digits then it could extend your payments further than the vehicles life; you could end up paying for a broken car that you don’t drive anymore.

What is a prepayment penalty?

Some loans have a prepayment penalty clause that penalizes borrowers for paying off all or some of the remaining loan balance early.

What is a balloon payment?

A balloon payment is the remaining balance of a loan that needs to be paid when the loan term expires. These usually occur when the monthly payments of a loan only cover the interest or cover very little of the actual principal so that when the loan term comes to an end the remaining balance is due in full.

What does principal mean?

The term principal refers to the actual amount borrowed and that needs to be repaid with interest.



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