Refinancing a car loan means taking out a new loan to pay off the balance of the existing loan. Some consumers do this to get a lower interest rate and decrease interest debt, while others are just trying to lower their monthly payments. While car loan refinancing can sometimes sound like a good solution, it also has the potential to be a bad idea.
Value
If you choose to refinance your auto loan in the late stages of your existing loan, you could end up extending the financing on your vehicle by three to five more years. Check the current Kelly Blue Book value on your vehicle to see if it is worth the remaining balance. Remember that a refinanced loan will add more interest debt as it extends the payment terms. When you add up the interest you will pay on the loan balance, you can find yourself in a position where the loan is worth more than the vehicle. If the vehicle were to be totaled in accident, you could be liable for paying off a large portion of that refinanced loan.
Trade-In
Refinancing your auto loan means you are carrying financing on the vehicle beyond the normal five-year loan term. If you get a refinanced auto loan in the third year of your original loan, and the refinance is a new five-year loan, then the vehicle would have a total of eight years worth of financing on it. If you want to purchase a new vehicle after owning the original vehicle for six years, you will have to attach the remaining balance of the loan to a new car loan. That creates multiple layers of auto financing to your next car loan and means you will be rolling two car loans into one when you finance the new vehicle.
Warranty
One of the advantages to purchasing a new vehicle is that it carries the manufacturer's warranty that will protect you from the financial burden of major repairs due to normal wear and tear. Extending the loan on your auto by refinancing it means that your loan term could extend beyond the term of the manufacturer's warranty. At the point where your car payments should end, you will still have the refinanced loan to pay on and you will also be responsible for the cost of any major auto repairs.
Penalties
Read the conditions of your original auto loan before considering refinancing. Some car loans have a penalty for paying the loan off early, according to Colin Bird, writing on Cars.com. If the penalty to pay off your auto loan early is more than the savings to refinance the loan, then getting involved in a refinance is a bad idea.
0 comments:
Post a Comment