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Refinancing Your Car

Why Refinancing A Car May Not Make Sense

Once you are a few years into your car payment, assuming it’s a newer car and has established equity, you may start receiving offers in the mail to refinance it. They may be tempting, promising you lower payments and a lower interest. But does refinancing your car make sense as a viable decision for your finances?

Interest Fees & Longer Term Note

Take a look at the interest being offered. Now look at what you will pay in interest fees over the course of the loan – usually listed somewhere on the paperwork. Add that up to what you’ve already paid, and factor in the extra years. You will quickly find that you end up paying more for longer and that you are just stuck in a longer note with a longer lasting monthly payment.

Depreciation & A Better Method

Also, factor in depreciation. If you refinance your car and owe more than it’s worth, you will have to roll over the difference if you buy a new car in the future. What’s more, what if your car breaks down and you have to repair it?

Instead, you can use a better method. Take what your car payment is right now. Pay one payment – the normal payment – each month as you have been doing. Then, in between, send a principal payment in each week. This will slowly but surely cut down the principal balance, from which the interest rate is factored. In essence, by using this trick, you will have effectively reduced your interest rate by a nice amount (dependent upon what payments you make the principal each month).

If you are diligent, you can have that car paid off at half the rate, regardless of your financing terms. And that’s smart thinking. To take things a step further, you could always look into refinancing the car once you have followed this simple method for a few years. Doing so would give you some wiggle room with lenders because you’d have a lot of accrued equity in your vehicle by this time.

In the case of an equity favorable refinance, you can get a much more lucrative interest rate because the risk to the lender has been reduced (presuming that your personal credit profile and ability to repay are intact). Being able to get out from under your car loan faster… well that’s a tune we can all hum to.

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