Chances are if you have an account at a bank or credit union, they’ve approached you at least once about refinancing your loan for your Oklahoma used car through them. As with any financial decision, there are some pros and cons to refinancing your auto loan through another lender. In this post we’ll take a look at some of the reasons you might refinance as well as some of the reasons refinancing might not be for you.
Pros of Refinancing
For many people, refinancing is the simple answer to the question, “How can I lower my car payment?” However, there are some other good reasons to consider refinancing as well. In general, refinancing your car loan has the following benefits:
Lower Monthly Payments – This is the big one. Refinancing your auto loan almost always results in a lower monthly payment than you paid before you changed over. It’s easily possible to cut your monthly payment by $100 or more, depending on the length of your loan.
Lower Interest Rates – In addition to lower monthly payments, refinancing can also net you a lower interest rate on your loan, which could save you money over time. However, a lower interest rate isn’t guaranteed when you refinance, so make sure to compare the new financing offer carefully with the one you already have.
Incentives – Your bank or credit union might offer you special incentives or bonuses when you refinance through them, such as a free gas card, the option to skip a payment, or special promotional rates. Make sure you weigh these incentives carefully and decide how much benefit they really offer before you refinance.
Cons of Refinancing
Though refinancing your auto loan does have some benefits, it can also come with some negative aspects. Make sure you consider the following cons before making a decision about whether or not to refinance your car:
Paying More Interest – One of the most common results of refinancing a car without doing research is that you end up paying more in interest than you would have if you’d simply kept your original loan. That’s because most refinancing agreements extend the length of your loan, meaning you pay interest on it for longer. Make sure to use a loan calculator to determine how much you’ll pay in total before deciding whether to refinance.
Going Upside-Down – If you owe more on your car than what it’s worth, refinancing could be a bad move. In fact, if you’re upside-down on a car loan most lenders won’t even allow you to refinance your car, since if you default on the loan they’ll be stuck with a car that they paid more for than it’s worth. Other lenders will allow you to refinance, but only at very high rates.
Prepayment Penalties – Some auto loans penalize you if you pay them off before the loan is complete. Since refinancing involves paying off the original lender with money from the new lender, you could get penalized for refinancing if your original loan includes prepayment penalties.
Higher Interest for Older Vehicles – If you’re refinancing an older car – one more than a few years old – you could end up paying a higher interest rate since the car isn’t worth as much at resale.
In general, refinancing can be a good tool for savvy car buyers, but only if you do it right and for the right reasons. If you refinance simply based on the promise of lower payments or interest rates, don’t expect to actually save any money over time.
Want to learn more about car financing and money management? The KEY in Oklahoma City offers free financial education and life counseling, making it simple to rebuild your credit and make good financial decisions. Visit our Oklahoma City used car dealership today and learn what you can do to improve your financial situation and find great high-quality used cars at the same time. You can also visit us on Facebook for more tips and advice.
