Pros and cons of refinancing a loan

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Pros and cons of refinancing a loan

When you have a car on finance you have the option to refinance your current deal to potentially get a better deal. There are a range of benefits of refinancing your current car loan but are there any downsides? And what should you know before you apply for refinancing? Will refinancing affect your current credit score? Let’s find out.

What is refinancing a car loan?

Car refinancing is when you take out a new finance deal to pay off your existing finance. The agreement is for the car that you currently have but replaces the current rates and payments. Just like you can choose to remortgage your home, you can refinance your car to a better rate too.

Benefits of refinancing your current car loan

Better rate

The main reason that people choose to refinance their car loan is to get a better interest rate. A lower interest rate can help you save money in the long run as it reduce the amount of interest you will pay overall. Many people with bad credit use car finance payments to improve their credit score by meeting the repayment deadline each month.

Lower monthly payments

If you’re struggling to meet your current repayments each month, you could consider refinancing your current deal to lower your monthly payments. You may be able to increase the loan term which helps to lower monthly payments, but it can increase how much interest you pay overall. However, if you keep the same term with a lower rate, this will usually lower your monthly payments.

Pay your finance off earlier

You can also choose to clear your debt earlier when you refinance. If you opt for a shorter loan term when you refinance, you may pay higher monthly payments, but you can pay your finance off quicker and benefit from a lower rate.

Disadvantages of refinancing your car

Never guaranteed

Car finance or any type of loan is never guaranteed. So, you shouldn’t take out finance in the first place with the intention that you can always get a better rate when you refinance. You will usually have to pass a credit and affordability check before you are accepted, this can be subject to the applicant and lender conditions.

Higher interest rate

If you want to refinance your car loan but you have bad credit, you may be offered a higher interest rate. If you miss payments during your agreement, it can damage your relationship with the lender and your ability to refinance in the future. Not keeping up with your repayments can also lead to the car being took off you if it’s a secured loan.

Negative equity

Negative equity is when you owe more than what the car is worth. If this is the case for you, refinance may not be an option. To prevent his from happening, it is recommended that you wait until you are at least halfway through your current finance agreement before you apply to refinance. At this point, your car is usually worth more than the finance you owe.

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