By John Campbell
If you’re currently paying off an auto loan, refinancing the loan may not be in your best interest.
With any refi, what may look like a good deal on paper may not turn out to be such a good deal when all is said and done. There are a lot of factors you need to consider before deciding if a refi is right for you.
Before you even consider a refi you’ll want to know if there have been any changes to your credit score since you acquired your first loan. If your credit score has increased significantly a refi may save you a lot of money, especially if your current loan’s percentage rate is in the double digits.
A credit score increase offers no guarantee of better interest rates if you already have a loan with good rates. If your automobile was new when you first financed it you’ll have to refinance at current used auto loan rates, which are actually around 1 percent higher than new auto loan rates. You’re also more likely to pay a higher interest rate on a refi if your credit score is lowered after you get your first auto loan.
Even if you get a better interest rate you may still wind up paying more interest if you extend the repayment schedule beyond your original loan term. For example, if you’ve made your regularly scheduled payments for 2 years and have 3 years to go to pay off your first auto loan, refinancing your loan for an additional 5 years will cause you to spend more on interest in the long run. Would you prefer to pay more in interest just to get a lower monthly payment?
If you plan to sell your car soon or are close to paying off your current auto loan, a number of additional fees you may have to pay will make a refi an even more unattractive option. If your current loan has a prepayment penalty you could be charged additional fees for paying off the loan ahead of schedule. You may also have to pay a fee to transfer the title of your automobile to your new lender.
As a consumer you have a right to find out what all the fees will be in writing before you sign the dotted line on any refi. Comparing the interest rates, loan terms and factoring in any additional fees should help you decide if a refi is right for you.
If the numbers add up to a significant savings go for it! Otherwise, you’d be better off sticking with your current auto loan.
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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.
