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Pros and Cons of Refinancing a Car Loan

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Refinancing in simplest terms can be defined as taking out a new loan to replace your old one. Usually, this is done in order to have the terms of the loan changed, such as extending the loan period and lowering monthly payments. Refinancing can be an attractive option, however, it pays to know that the benefits vary depending on an individual’s circumstances.

Pros:

Lower interest rates. Perhaps the biggest benefit of refinancing your car loan is the opportunity to lower your interest rates. If you had poor credit or no credit prior to financing, your rating might just have improved and so you might be eligible for lower interest rates at this point.

Lower your monthly payments through loan extension. Certain life events such as accidents or sickness can distress your financial life, and during these tough times you will certainly need to reduce your monthly outgoings and free up some cash. By refinancing, you can extend the life of your loan and lower your monthly payments. Although this may seem more expensive in the long run, you’ll realize that this will give you more room to breathe and can even help you avoid getting in debt.

Switch lenders. Changing lenders can work to your advantage, for instance if your current lender is difficult to deal with or if you can find a better rate somewhere else.

Access more money. For example, if you’ve owned your vehicle for quite some time and it’s worth more than what you owe, you can refinance it and get more money out to use on other things. For instance, your car is worth £6000 and you have remaining debt of £4000. You can refinance your vehicle for £5000, which is still less than what your vehicle is worth, and have an extra £1000 after paying off your old loan, which you can use for other expenses.

Cons:

Pay higher interest rates. Contrary to the first pro, sometimes you might actually have to pay higher interests if you refinance your vehicle, especially if it’s a bit old. If the only reason you’re refinancing is to take money out of its value, be very careful because most lenders will charge high fees and interest rate for this. This can also be risky because your vehicle is being used as collateral.

Pay more over the course of the loan. Refinancing almost always means that you’ll have to pay for a higher amount of the loan in full. Although you can sometimes lower your interest rates, the duration becomes longer, and so you will certainly pay for more. It might not be an issue with you if what you’re after is the lowered monthly repayments. But if you’re looking to save money, refinancing might not be the best solution for you.

It is very important that you understand the consequences of refinancing before making your final decision on it. Make sure you have calculated for the total repayment amount on your whole new terms and conditions.

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