It’s a question that comes up over and over again in automotive enthusiast circles: should I refinance my car loan? Will it save me money? What about the thousands of dollars of credit card debt you’ve racked up to finance your lifestyle? Shouldn’t you be paying that off first?
Today we’re breaking down exactly what refinancing is, so you can decide if it’s the right move for you.
What does refinancing mean?
Refinancing is essentially taking out a new loan to replace an old one. It’s the automotive equivalent of refinancing your home, combining your current loans into one manageable payment.
When you refinance your car loan, you take out a new loan with a lower interest rate to pay off all (or some) of your existing debt plus finance charges. The resulting payment is almost always lower than the combined total of your original payments.
How does refinancing save you money?
There are two different ways that refinancing can help you save money. First, it lowers your monthly payment due to a lower interest rate. Second, it can shorten your loan term if you choose to pay off the remainder early.
How do I refinance?
Here’s where things get tricky. When you refinance your loan, the new lender requires you to submit a copy of your credit report and score ahead of time if they’re not validating it for free. This has to be done through the automated system offered by each bureau or using an offer code that is given when you sign up with certain lenders.
Using an offer code for a free credit check is the quickest way to get your report and score in front of several different lenders, who you can then ask for their best refinancing rates. You don’t have to pick any specific lender, but it’s important to remember that you will be handing over your credit card information when you apply for the free offer, which will incur a hard inquiry.
Should I refinance?
Whether you should refinance your car loan is really just a question of whether it makes sense for you financially. You have to weigh the savings against starting a new loan term. For example, if you refinance for three years instead of five, it will take twice as long to pay off the car loan – which won’t help you build up equity any faster. And keep in mind that refinancing your car loan will have no impact on your credit unless you’re going from a secured loan to an unsecured one. That means you can’t get a free credit report or score unless you create an offer with each bureau separately, which will take some time.
The bottom line: if refinancing makes sense for your budget and shortens the term on your loan so you pay it off faster, go ahead and do it. And if you want to be even more aggressive with your budget, check out our series of articles on paying off debt once and for all.
When you’re shopping around for the best refinancing deals, make sure to look for options specific to your city, such as car finance Melbourne to get the best local rates available.