Best Reasons for Refinancing a Car Loan
What is refinancing and when should you do it?
Refinancing your car loan is simply following the same process as before, but with a better credit rating. Lenders will check your credit score, and if it has significantly improved, you may qualify to refinance with a better term and a lower rate.
Financing a vehicle can positively affect your credit score if you are responsible and making your payments on time. In the most basic of terms, credit is how trustworthy you are to banks to pay off your debts. Therefore, financing a vehicle be a great way to build your credit if you know you can make your payments. The better your credit score, the better your bargaining power becomes with any type of financing. Because of this, responsible borrowers who have improved their credit over the course of their loan should consider refinancing.
However, keep in mind that your credit rating and ability to refinance your vehicle is not limited to your car payments. If you have missed payments on other types of contracts, such as a mobile bill or mortgage, you may not be qualified to refinance your car. Always make sure all of your financial obligations are paid on time to maintain and build your credit score.
Refinancing a car can get you lower monthly payments.
Sounds great, doesn’t it? Even a small change in your rate can significantly lower your monthly payments. Even if your credit score hasn’t improved by much, if you have been making regular on time payments, refinancing a car may be an option. Before you apply for refinancing check your credit score* and see if it has improved. Keep in mind that having your score checked through lenders can negatively affect your score.
*You can check your score online at www.creditkarma.ca/. Keep in mind this is only an estimated score and might not be accurate to your bureau. For a full accurate score you can contact Equifax or Transunion directly and get your free yearly check. These options will NOT affect your credit.
Refinancing a car can shorten your term length.
When you initially got a car loan, you may have been in a completely different financial position. If you are now in a position where you are easily making your monthly payments and can afford to increase them, refinancing can get you a lower term length. Why does this matter? You can benefit from a shorter term length because cars decrease in value over time. If you are making the same payment on a vehicle after 7 years, you are paying more for a lower valued vehicle. The sooner you fully pay off your vehicle, the sooner you turn your liability into an asset that you fully own.
Similarly, refinancing a car can extend your term length.
If you find yourself in a financial bind, you can refinance your loan to extend the term and lower your monthly payments. This is always a better option than just allowing yourself to miss payments on your current loan. Missing payments can cause your credit score to fall drastically, leaving you in an even worse credit situation than before.
You can remove a co-signer or add a payee.
If your original loan required a co-signer to qualify you may want to remove them for a variety of reasons. If the vehicle was financed by someone for an unqualified buyer, they’ll likely want to change the financing terms to apply to the correct person. An example of this is a parent financing a car for their child. Eventually, the car can be refinanced in the child’s name and begin building their credit.