You don’t have to be stuck in a bad loan forever. When you refinance a car loan or other types of loans, you trade in your existing loan for one with better terms.
Refinancing: the basics
Refinancing is the process of applying for a new loan to secure a lower interest rate or extend your repayment schedule. When you’re approved for the new loan, your lender will pay off your existing loan, and the old loan account will be closed.
When is refinancing a good idea?
Refinancing is beneficial in many situations. For example:
- You can’t afford your current payments: If you’re struggling to keep up with your monthly loan payments, refinancing into a loan with a longer repayment term can help get you back on track. However, a longer term could lead to a higher overall cost due to interest.
- Interest rates are lower: A good time to consider refinancing is when interest rates have fallen. If interest rates are lower than when you got your current loan, refinancing can get you into a better rate, saving you money over the life of your loan.
- You have a better credit score: If you have a better credit score than when you applied for your current loan, refinancing might help you secure better terms. A higher credit score could translate to a lower interest rate and lower monthly payments.
- You have a variable loan: The interest rate on a variable loan fluctuates during the life of your loan. Many people prefer the predictability of fixed loans since the interest rate remains unchanged for the entire duration of the loan.
Should you refinance?
If it gets you into a more affordable loan with a lower rate and better terms, refinancing can be wise if it helps you avoid missing payments, which can severely impact your credit score and financial stability. Though you might see a ding on your credit score after refinancing, it’s preferable to a late payment that can remain on your credit for several years.