When It is Most Beneficial to Refinance Your Car Loan
Written by DriveAxis.ca June 21, 2023
Car purchases are a big investment, but they are often one of the most exciting. However, many Canadian drivers pursue a car financing loan without a proper understanding of the terms associated with it, and that can cause significant financial losses as time goes by. One of the best ways to mitigate this problem is to refinance an existing car loan at a later date, when possible.
There are lots of advantages to refinancing a car loan, nearly all of which are associated with saving thousands of dollars before the final payment has been made. It’s good to understand the exact reasons why people refinance their car loans, and why it is so beneficial when the opportunity arises. If you’re thinking about refinancing your car loan, you’ll definitely want to read on.
Reason #1 - Lower Interest Rates
One of the most compelling and attractive reasons to refinance your car loan occurs when market interest rates decrease. This happens rather frequently to some degree, depending on the economic period in question, as well as other financial factors. The interest rate you signed for at the start of your loan may be quite different a year or two into the future. If you find that current interest rates have suddenly plunged lower than what you initially signed for, the act of refinancing could allow you to take advantage of far better terms, leading to reduced monthly payments. While it may not seem like a lot per month, the accrued savings over the rest of your loan could add up to substantial savings.
Reason #2 - Better Credit Score
It’s an ages-old truth - your credit score plays a pivotal role in determining the interest rate you receive when applying for any loan, including an automobile. If you’ve managed to clean up your credit history and gain a more favorable score, then it might be time to consider refinancing your car to secure a more favorable interest rate. A higher credit score demonstrates improved creditworthiness, and usually qualifies a person for better loan terms, ultimately reducing the total amount of interest you'll pay. Plus, if you can maintain the same discipline you displayed while cleaning up your credit score, a refinanced car loan will only make it look better.
Reason #3 - Financial Difficulties
Life is full of unexpected twists and turns, which means you may encounter financial hardships you couldn’t even fathom when you first signed on the dotted line to buy your car. This could be a death in the family, a divorce, or a severe injury preventing you from working. Regardless of the scenario, if you've experienced a significant change in your income, or are facing financial hardships, it might be best to consider refinancing your car loan. Some choose to extend the loan term in order to qualify for lower monthly payments, which can take a lot of the pressure off of your financial situation. Bear in mind, however, the long-term implications of extending the loan, as you may end up paying more interest overall. Yet, it may prove to be a beneficial stopgap in the short term.
Reason #4 - A Shorter Loan
If your credit is good, and your financial situation plentiful, there’s no reason whatsoever to continue with your existing car loan. Instead, consider refinancing in order to get a shorter loan term, which in turn will undoubtedly trigger a lower interest rate. Since a car is the second-largest expense for most families, it can pay dividends to get rid of the loan faster. This has the added benefit of building equity in your car at a faster rate. Although your monthly payments will undoubtedly increase, the overall interest savings and the ability to own your car outright sooner can make it a worthwhile choice. Few things in life are better than striking another debt off your list.
IN CONCLUSION
Think of the act of refinancing your car loan as a strategic tactic that can be used to improve your overall financial situation. Most times, it will save you tremendous amounts of money, while other times it may be used to lighten a short-term financial burden. Always remember to consider factors such as interest rates, credit score changes, financial stability, and your desired loan term before making any decision.
Does the prospect of financing a car loan scare you? If so, you’ll be pleased to know that DriveAxis handles all of our financing in-house, which can guarantee your approval when you’re ready to buy your next vehicle. Plus, each of our cars is backed up by a rigorous inspection process to ensure you drive off the lot with peace of mind and full protection. Contact us today if you’re curious about how to finance your next car!
