Loan refinancing is often associated with home mortgages, but it is also possible to refinance smaller loans, such as car loans. When you refinance a loan, a lender pays off your existing loan and then offers you a new loan in return. Refinancing an auto loan can have several notable benefits.
Monthly Payments
One of the biggest benefits of refinancing an auto loan is the potential to reduce monthly payments on the loan. When you refinance a loan, the terms of the loan can change, meaning you can get a different interest rate. If interest rates have fallen since you first took out the loan, refinancing will likely reduce the interest rate on the loan, which can lower payments. This can be a significant benefit if your income situation has changed and you are in jeopardy of missing payments. If you miss a payment, it can have a negative impact on your credit score, so refinancing can be a way to protect your credit score. Successfully paying off your refinanced loan may help boost your credit score.
Loan Duration
Refinancing can alter the duration of an auto loan. For instance, if your original loan was set to be paid off after three years, and you paid on it for two years, your new loan could also be set to three years, essentially extending the loan for two more years. Extending a loan can greatly reduce the amount of money owed each month, although it will mean that you will be paying interest over a longer period of time. If the new loan is set to be paid off by the same time as the original loan, and you are able to get a lower interest rate, refinancing will decrease the total amount of interest you will pay.
Fixed Versus Variable Interest Rates
Another potential benefit of refinancing an auto loan is that you may have the opportunity to switch from a variable interest rate to a fixed rate or vice versa. Fixed interest-rate loans stay the same regardless of changes in interest rates in the overall economy. By changing to a fixed-rate loan, you can protect against interest-rate hikes that may occur under a variable-rate loan. On the other hand, if interest rates are falling, a fixed rate may keep you paying more interest than you have to. A variable-rate loan will typically adjust downward if interest rates in the economy fall.
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