Refinancing is a hot term that is being thrown around a lot these days. Many people are looking for ways to save money, and refinancing is one of the best methods to quickly save thousands of dollars on your loan. But refinancing might not be as easy as you think. Here are some things to think about if you are wanting to refinance your car loan.
1) You can't be upside-down and expect to refinance.
If you owe more on the car than what it is worth, this is what is known as being upside-down on a car loan. There are a couple of common ways that this can happen. If you purchased a new car and didn't make a larger down payment, most certainly at some point in the loan you will be upside-down. Most cars take their largest depreciation hit in the first three years. Therefore it's highly likely that if you financing the majority of the car price, the depreciation will outpace your payments on the loan. If this is your situation, you will not be able to refinance your car loan until you owe less than its value.
2) Extend the length of the loan.
Refinancing may not be an option if you are upside down, but what can you do if you still need to lower your payments? One option is to increase the length of the loan. This will allow you to spread out the remaining balance for a longer period of time, which will make your payments smaller. It's also win-win for the bank, because they can collect interest on the loan for a longer period of time.
3) Refinancing could be dependent on your credit status.
Lenders are less likely to approve refinancing if your credit is bad. They view customers with bad credit as risky, because they have a history of being irresponsible. Until your FICO score improves, you may find it is extremely difficult to refinance. This is true even if you are not upside-down on the loan. If this is the case you may have to ride out your current loan terms for awhile until you have a history of making timely payments.
Refinancing makes sense almost 100% of the time, if you are able to do so. If you owe less than the actual value of the car, and your credit is good, you would be foolish not to refiance. The cost and time it takes to do so is minimal, yet it could save you thousands of dollars.