A monthly car loan payment is the second-most expensive bill for many individuals. Refinancing can help lower your monthly payment and reduce the interest that you pay. It can also lengthen the term of your loan.
The process of auto loan refinancing can seem intimidating, but it doesn’t have to be when you choose to use a company like Lantern by SoFi. According to Lantern by SoFi, “Leave the heavy lifting to us. Our partners handle paying off the old lender and re-titling the vehicle as part of the car loan refinancing process. That means no day spent at the DMV for you.”
Why You Should Refinance Your Car Loan
1. Lower Your Interest Rate
If you can reduce your current loan rate by a small amount, it could make sense to refinance. If you had poor credit or no credit when you bought your car, you might be able to lower your interest rate by making on-time payments and maintaining a good credit history. In addition, if interest rates have dropped, you might have also accepted a higher rate to get the best deal on the car.
2. Lower Your Monthly Payment
Refinancing can help lower your monthly payment. This will free up funds for you to pay off other debts. It can also help you through financial difficulties, such as a sudden drop in income. To get the most out of your refinance, you’ll need to extend the terms of your loan.
3. Pay Off Your Loan Quicker
If you’ve had a significant increase in your income since you bought your car, it might be time to consider refinancing to lower the interest rate and pay it off sooner. Doing so could help direct more of your money to the principal to save interest.
4. Take Out the Equity in Your Car
If most of your car loan has been paid off and you need emergency funds, you might be able to take out a cash-out refinance loan. This type of loan allows you to take out a considerable amount of money than you would with a traditional refinance.
It’s important to note that cash-out refinancing isn’t for everyone, as it should be used only for emergencies. You might want to consider this option if you have a plan to pay off other high-interest debts you owe.
Possible Downsides of Refinancing to Consider
Refinancing can lower your interest rate and reduce your monthly payment, but achieving financial freedom is not always possible.
1. You Might Pay More Interest
If you’re planning on reducing the monthly payment by a certain amount, you might pay more due to the additional interest that you’ll be charged. Even a lower interest rate won’t be enough to offset the cost of paying interest for an additional year or two.
2. There May Be Fees to Pay
If you’re considering a cash-out refinance, make sure to compare the total fees you’ll be charged with the amount you’ll be saving. If you’re planning on reducing the monthly payment by a certain amount, you might pay more due to the additional interest that you’ll be charged. Some lenders also charge a fee for transferring the title or re-registering your car.
3. You May End Up Upside Down
If you’re planning on extending the terms of your loan or taking cash out of your equity, you might owe more than the value of your vehicle.
Should You Refinance?
Before starting a car loan refinance, you must have a clear goal. Having a clear goal can help you save money and lower the monthly payment. It will allow you to make informed decisions and get the most out of your loan.