Many people successful have used refinancing a car loan as a strategic financial move. As long as it is managed correctly, it can lower your monthly payments, reduce interest rates, and bring financial relief. However, a common question arises during this process: Starts your car loan over when it is refinanced? We’ll dig into this concept and explain what it means for your term, your financial health, and your future decisions.
Refinancing a car loan explains itself
Replacing your existing loan with a new one, via a different lender, is refinancing a car loan. The goal of refinancing is often to achieve one or more of the following benefits:
Lower interest rates: Refinancing is possible when your credit score has improved, or the market rates have gone down since you took on the first loan.
Reduced monthly payments: This can lower the monthly cost, and allow you to afford the payments if you extend a loan term.
Debt consolidation: For simplicity, combining multiple debts, including car loans, into one loan.
However, the structure of the new loan might influence whether you’re essentially “restarting” your loan term.
So, Does Refinancing Restart Your Loan?
It depends on how you structure the refinancing: yes and no, in a word.
1. Restarting the Loan Term:
If you refinance, you’ll probably also receive a new term with the new loan. For instance, if you had three years left on a five year loan and decided to refinance that five year loan to a new five year loan, you’re essentially starting with a new clock. So what that means is you’re paying for a total of eight years (five of the new loan plus the three already paid).
2. Maintaining the Same Loan Term:
But some lenders do allow you to refinance without extending the loan term. Say you have 3 years and you could refinance it into a 3 year loan with better terms. With this option you don’t restart your loan and may lower interest rates or monthly payments.
3. Extending the Loan Term:
Be it extending the loan term, such as refinancing a three year loan remaining to a new five year loan, or stretching the payments or doing neither of the above, this helps the payments to be spread over a longer period. This cuts the monthly bill, but increases the overall interest bill on the loan over its life.
Refinancing Car Loan Pro and Cons
Pros:
1. Lower Monthly Payments:
When your situation changes, refinancing can lower monthly expenses.
2. Reduced Interest Rates:
You could save hundreds or thousands of dollars on the life of the loan if you qualify for a lower interest rate.
3. Improved Cash Flow:
An extension of a loan allows to use money for another financial goal.
4. Debt Management:
Refinancing can be an easy way to simplify debt payments and make budgeting more of a challenge.
Cons:
1. Restarting the Loan Clock:
Speaking of, refinancing can also reset your loan term, which means you’ll pay it off for that much longer with more total interest paid.
2. Additional Fees:
Some lenders charge fees when you refinance such as application fees, origination fees or prepayment penalties.
3. Higher Total Interest:
However, extending the loan term may lower monthly payments, though overall amounts paid will be higher.
4. Credit Score Impact:
Refinancing leads to a hard credit check, though, which can temporarily drag down your score.
Refinancing: How to Decide if Its Right for You
The refinancing doesn’t work for everybody. Consider the following factors before proceeding:
1. Your Credit Score:
If your credit score has improved large enough, then you might get new and lower interest rates.
2. Remaining Loan Balance:
If you’re close to paying off the loan you have today, refinancing may only save you a little.
3. Loan Term Goals:
Ask yourself if you’d prefer to reduce the payments every month or if you’d prefer to pay off the loan quicker.
4. Current Interest Rates:
Research how many points the interest rate will be if you refinance.
5. Fees and Costs:
Make sure you account for any fees you will pay to refinance and also that it will be overall a more beneficial offer.
Refinancing a Car Loan – Without Restarting the Clock
1. Choose a Shorter Loan Term:
Pick a loan term that is as or less than the length of time you have left to go on the car.
2. Shop Around for Lenders:
Get multiple lenders to offer you to get the best rates and terms.
3. Negotiate for Better Terms:
When you have good credit, renegotiate for good terms that are in line with your financial ends.
4. Read the Fine Print:
Make sure that there are no hidden fees or conditions that would erode the benefits you’d enjoy from refinancing.
Example Scenarios: Restarting vs. Not Restarting a Loan
Scenario 1: Restarting the Loan
Sarah has 3 years left of a car loan, which she has 7% interest on. She takes a new five year loan at 4% and refinance. She’ll pay for eight years total, but her monthly payments will drop.
Scenario 2: Maintaining the Loan Term
John has 3 years left on his loan at 6 percent interest rate. Instead, he refines into a new three year loan for 3.5%. He gets the same payments, but no interest payable if he doesn’t repay extended loans.
Final Thoughts
Is reinvesting in a car loan a wise financial move? Refinancing sometimes restarts your loan, but you can manage the impact by picking shorter terms, or negotiating favorable refinancing terms.
If you understand the consequences of refinancing and take the time to work out your plans, you can take advantage of the financial benefits of refinancing as long as you have kept your loan in line. You should always speak with a financial advisor or lender if you’re in doubt about what’s going to be best for your situation.
