When to Refinance a Vehicle?
- When a vehicle loan is refinanced, a lender purchases the original loan and pays it off. Afterward, he issues the borrower a new loan with different terms. Although borrowers may have various reasons for wanting a new loan, refinancing is mostly undertaken if the borrower believes he can gain some financial advantage from the transaction. The financial benefit must be large enough to overcome the cost of refinancing, which may entail the payment of various fees.
Change in Interest Rates
- One of the main reasons a person may wish to refinance is if interest rates available to borrowers have dropped since he took out the original automobile loan. If lenders are offering lower interest rates, it may be a financially wise decision for the borrower to swap out his current loan for a new one on which he can pay less interest. However, if his current loan has a prepayment penalty -- a fee for paying off the loan early -- refinancing may not make financial sense.
Change in Financial Situation
- A person may also wish to refinance if his personal financial situation has changed and the size of his income or his expenses have changed. In addition to changing the interest rate of a loan, a person can refinance to change the repayment structure. The person may be able to pay over a longer or shorter period of time, which will change the size of his payments to suit his ability to pay.
Change in Credit Rating
- A person may also wish to refinance a vehicle loan if his personal credit rating dramatically improves from the time in which he took out the initial loan. Many lenders heavily base their interest rates on an individual's established ability to meet his debt obligations. If a credit rating bureau has raised the person's rating, he will receive lower interest rates. To determine whether his credit rating has changed, a person should request a copy of his credit report.