The Risks of Refinancing Your Car Loans

Refinancing a car loan allows you to seek a new loan at a lower interest rate than your existing debt. You can use this new loan to pay off your existing debt, and then you will pay the new lender a lower amount over time. Many people seek to refinance when interest rates are reduced and adjusted on a national level. Others refinance because they are in significantly better financial health than when they purchased the car, allowing them to achieve a lower rate. Refinancing can save you money over time, but there are risks involved.

Early Pay-off Fees

Usually the largest risk involved in refinancing an auto loan is the fees you will be assessed for paying it off early. Most lenders write these fees into contracts to prevent you from paying off the loan and not providing them the interest they originally anticipated. if you received your loan directly from the auto manufacturer, you should watch out for these fees. Companies like Nissan and GMC have loan companies that provide financing for those who purchase their automobiles. While the interest rates on these loans are typically competitive, the terms to pay them off usually are unfavorable. Check your policy to see what type of fees you will be assessed. If those fees outweigh the savings you will gain from refinancing, do not refinance your vehicle. The important thing is to keep the entire picture in mind when you are deciding on the best money saving option.

Negative Credit Report

You need to be aware of the way refinancing an auto loan affects your credit report. Paying off a loan prior to the day it is due is not looked upon highly from lenders. Lenders provide you an interest rate based on how much they would like to earn over the life of the loan in exchange for providing you the money. If a lender expects to earn a rate of, for example, 1.7% on your auto loan over 5 years, that lender may lose money if you pay off the loan after only 3 years. Because paying off loans early is not looked upon as a "good" thing from lenders. Although paying off credit before the due date is not looked upon favorably by lenders, as a borrower you may benefit. Just remember to make your payments on time because it is one of the best ways to build your credit score.

Predatory Lending

You should be looking out for offers that are "too good to be true" when it comes to refinancing your auto loan. Many refinance lenders will offer a very low introductory rate that will adjust after a short period of time. Be sure to find out whether the rate is adjustable or fixed prior to agreeing to it. It may turn out the interest rate is higher than that you are already paying. You should also look out for call provisions which allow the lender to "call in the debt" prior to the date it is due. This usually occurs when interest rates drop. 

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