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Does Refinancing Your Car Ever Make Sense?


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Are you saddled with a monthly car payment that eats into your budget? Is it so expensive, you wish you’d never bought the vehicle to begin with?

Maybe you didn’t have a choice at the time, but the situation may be completely different now. It could be well worth your time and effort to find out if refinancing your car is the right move.

Does refinancing your car ever make sense? It might, if:

You can get a lower interest rate. One of the primary reasons why you might want to refinance your car loan is to obtain a more favorable, lower annual percentage rate or APR. When you refinance, you can pay off your current lender and get a new loan that’s easier on the wallet.

While lowering the interest rate is generally the reason, you may also want to lower your monthly payment and are willing to extend the length of your loan. Just recognize that this means paying more money over time. That might not be a strategy you want to employ. In general, The Car Connection doesn't recommend loans for more than 48 months, but some luxury cars may retain enough value to justify another 12 months of borrowing.

In any event, to get a lower interest rate, you need to shop around. Keep in mind that the lowest interest rates go to those with the best credit scores. Check out websites such as Bankrate.com, LendingTree.com, ELoan.com and Credit.com, among others.

You project estimated savings over the life of the loan. Nobody wants to pay more than they have to for the full life of a car loan. When you pay off your existing loan, you’ll cut out some finance charges. And, if by refinancing you can secure a lower interest rate so that your monthly payment is lower, you’ll save money for the duration of your loan – assuming it’s a reasonable period, such as 36 or 48 months.

Another tip is that paying off your current loan will likely boost your credit score, since it will show up as paid in full. A higher credit score might result in you obtaining a more favorable APR on a refinanced car loan.

You’re less than two years into your loan. Refinancing your car loan only makes sense when you’re fairly new to it, no more than two years along. That’s because cars lose their value over time, as depreciation begins the day you drive it off the lot or take title. If you refinance at four years for another four years, you’ll wind up paying more for the loan than your car is worth at the end. Suppose you get into an accident and your car is totaled? What if you have to sell it? You could be in a seriously negative cash-flow situation.

Your current loan doesn’t have any prepayment penalties. It pays to read the fine print in your current finance contract. If there are penalties for prepayment included, getting out of that contract could be costly.

Bottom line: refinancing your car may be a good move or not. Be sure to do your calculations carefully, shop for the best deal, and go for the shortest term loan you can.

MORE: See Top Car Financing Options and How To Finance A Car And Get A Loan

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