Nothing compares to the excitement of riding off in a new car, especially one you’ve dreamt of owning for a long time. It’s understandable if you want to purchase it as soon as you can; however, you may have to rethink your plan for now.
Since the beginning of 2020, car prices have been rising, even for used ones. And, experts don’t foresee the prices dropping anytime soon. So, if you’re purchasing your car using a loan, the monthly repayments might be much higher than you’d expect (and that they might have been in the past).
As with most other industries, the coronavirus pandemic significantly affected the auto industry. To begin with, there was a need to minimize public interactions and mass exodus from the cities. This contributed to a surge in demand for new cars.
While that’s a good thing for the sector, there were also significant challenges. For instance, social distancing requirements and lockdowns reduced the production of cars by as much as 3.3 million units. As a result, chipmakers turned their focus to the electronics sector to address the deficit in demand.
With things now somewhat back to normal, chipmakers are faced with a huge demand from car manufacturers that’s proving challenging to meet.
Auto loan refinancing is when you take a new loan to repay the balance on your existing loan. The objective of refinancing is simple; to get better repayment terms. Similarly, the new loan is secured by your vehicle, and you’ll pay it off over an agreed-upon duration via monthly installments.
There are two primary ways refinancing your auto loan can save you money. This is through accessing lower interest rates or extending the repayment period. Low interest rates reduce the total interest you’ll pay over the duration of the loan. With this, the monthly payments will also be lower.
By extending the loan duration, your repayments will be spread over a longer period and into more installments. As such, each monthly repayment will be much lower. However, when exploring this option, you have to be careful as extending the loan term by too much will also increase the interest you pay.
At Harrison Federal Credit Union, you can take advantage of either or both options. Alternatively, you can capitalize on low interest rates and continue paying the same amount, perhaps a bit more, to pay off your car sooner.
While refinancing offers many benefits, it’s only if you do it with the right auto loan lender and at the right time. So there are key factors that you should consider. These include:
- Current Interest Rates. Over time and due to various economic factors, interest rates are adjusted. So, keep in mind the interest rate you’re paying and always monitor interest rate fluctuations. When the rates reduce by two or more percentage points, consider refinancing. Although 2% may seem insignificant, it will have a huge impact in the long run.
- A Change in Your Financial Position. Depending on how things unfold, you may be in a better financial position than when you first applied for the loan. Along with this, your credit score and debt-to-income ratio may be much better. If so, this may qualify you for lower interest rates. Combined with the ability to pay more each month, you can pay off the loan much quicker.
Another time that’s ideal for refinancing your auto loan is when your financial situation takes a turn for the worse. Refinancing can help you extend the repayment duration. While you may not want things to get to this, it will give you some room to maneuver out of financial difficulty.
