If you are considering refining your auto loan, you are one of thousands of people who do this. But why do they choose to refinance? A lot of people think it comes with nothing but benefits, but there are actually some disadvantages to consider as well. Since this is a financial construction, you need to make sure that you opt for the loan that leaves you with the most money in the long run.
The First Thing to Consider
If you want to refinance your car loan, you need to make understand that you will extend the length of time that you will be in debt. That said, it shouldn’t be a reason for you to not refinance your loan. What you do have to consider, however, is the rate that you are offered. This is why you really need to think about, as you will only lower your monthly payments if you get a good rate.
The Downsides of Refinancing
Assuming that you find a good rate, you will be lowering your monthly payments. At the same time, you will generally owe a bit more and you will have to pay it back over a longer period of time. That is the main downside, because you are committed for longer, meaning you have to budget for your loan for longer as well.
Should You Refinance?
Refinancing rates are likely to be lower than your original rate. This means you pay less every month. Since most of us have to really watch what we spend, this is a huge benefit. This is particularly true for people who already have bad credit. The fact that you have to pay back for longer periods of time is often not a problem in that case.
However, around 50% of people make a huge mistake when they refinance, and that is that they don’t realize that they are breaking their contract. This means that you will usually be charged a fee, and that can be a very high one. That is the main thing to consider, because you may end up not just paying your loan back for longer, but you may end up paying back more than you originally would have as well.
So is refinancing a good idea? Yes and no. The reality is that some people end up having to pay back more money overall, which is always a downside. That said, if you are going through difficult financial time, then the fact that, in return for paying back more, you pay less a month, sometimes significantly less, then this seems like a small price to pay. What matters is that you look properly at your own budget, what you have coming in and what you have coming out, and that you base your financial decision on that. Do also consider what you believe your personal income situation will be like over the next few years. While auto financing loans are usually short in duration, you do have to make sure you can continue to pay for it.