When it comes to buying a car, it is easy to get ourselves into a bit of trouble when we get our first one. That is the case even if we get that famed sweet sixteen gift of a shiny new (or perhaps gently used), seeing as eventually we will end up needing to get one on our own. So, what am I getting at here, then?
Often, we may not realize when a loan is not the best deal that we can find. I have noticed that this happens a lot with auto loans in particular. There are probably a few reasons behind this, though, so I will try to dig into a few of them here today.
Obviously, this topic is a pretty huge one to try to tackle all at once. There are a few different types of auto loans, and the exact nature of yours will probably be dependent on who your lender is. So, as you read through this today, just keep that in the back of your mind.
Defining Auto Loans:
At first glance, this section may appear entirely unnecessary. While I do understand that sentiment to a certain extent, I also believe that many people in the world are woefully misinformed on what these are and how they work. We see the term and we think “ah yes, money that we borrow to buy a car,” and often miss some of the nuances that exist in tandem.
Of course, that is the simplistic definition of this term, so do not get me wrong there. The only other thing to mention on that level is that both the borrower and lender agree to a set of terms that will at the very least include how repayment will work. However, there will probably be a few other aspects that we should consider.
Digging Into Terminology
A lot of what I am going to explain here can apply to all sorts of loans, but I do still find it worthwhile to understand. After all, if we do not understand the basics of all of them, it is difficult to truly follow suit with the more specific types. So, where should we start, then?
The first thing is called “principal.” This is the original amount that you agree to borrow. For instance, if you are borrowing thirty-thousand dollars for an auto loan, that would be the principal amount. Obviously, it is a figure that you should be aware of before signing any contracts or documents.
Next comes the “loan term.” As the name suggests, it is simply how long the agreement will last. Something that I want to highlight here, though, is that you should take note of how long it is. You see, the longer that the credit agreement lasts, the more that you will end up paying. Why is that?
Naturally, it has a lot to do with interest rates. Interest is a percentage that you will end up paying back to your lender on top of the principal amount. Unfortunately, it is what tends to make affording these things quite difficult for a lot of people – especially when the national and global rates of inflation are quite high.
That does bring me to the next thing that I would like to cover, though. If you do find yourself in a credit agreement that has an exorbitantly high interest rate (including an auto loan, believe it or not), you can do something called refinancing. You can go to this website refinansiere.net/refinansiering-av-billån to get an example of what that might look like, but I will be explaining as well.
Starting off easy, let me cover what refinancing is, exactly. It is essentially a transfer of your credit account to another lender, and there can be a variety of motivations behind this. More often than not, though, it has something to do with finding a lower interest rate. This can make a huge difference, after all, especially on a large principal amount.
Perhaps you are wondering why someone would do this with an auto loan, though? Consider the amount that these can end up being. Most vehicles go for over thirty-thousand United States dollars at the moment. This is certainly nothing to sniff at – it is a considerable price.
Now, picture the interest that someone could end up having to pay on that. Easily, it could reach figures into the thousands – if not tens of thousands. If the originally agreed upon term spans a long period of time, too, that only increases. So, refinancing exists to allow us to essentially hit the “redo” button on that initial agreement.
Obviously, this can really come in handy. What traps should we avoid falling into, though? Notably, just be careful that it will work out in your favor. Most lenders who offer this option will ensure that, though, since they do want your business. I simply recommend that you examine the contract or other documentation carefully to double check – it is a good habit to get into.
Shifting gears just a tad, let me explain the final aspect of auto loans that I am going to discuss today. That is, as you may have already guessed, the matter of a “down payment.” In essence, it is the way that most lenders make sure that you are not borrowing over your own financial means. No matter how much you borrow, you do have to pay a certain amount with your own cash.
Remember that before you decide that you want to get the most expensive car in the lot, but for the most part, I am sure that most people are already aware of that. Think of this as a “just in case” sort of thing.
The Bottom Line: Should You Refinance?
So, this is probably the question that you have been waiting for me to answer this entire time, right? I totally understand that. Before I fully tackle it, though, you may want to learn some additional information. If that is the case, check out this link: https://www.cnbc.com/select/pros-and-cons-of-refinancing-home/. Getting information from a few different sources is never a bad thing, right?
Now, I do recognize that the article I mentioned above covers mortgages, which are not exactly what we have been discussing here thus far. This may be true, but the overall themes can still apply here. What else do we have to discuss about refinancing, then?
I suppose that one of the main questions is when it is appropriate to do versus when it might be a bit of a waste. If you are wondering that, allow me to explain. Unsurprisingly, there are a few different factors at work here that can influence the answer.
One of the most important things to consider is whether your current loan has something called a prepayment penalty. They are when you could face additional fees and charges for ending your agreement early. You see, when you do this, the lender does lose out on some profit in the form of the interest that you would have paid.
Now, if it is a nominal fee, then it is probably still worth it. However, if it would be a significant chunk of change, it may be worth rethinking your plan at least to some extent. After all, the goal is not to hurt your wallet more, so doing so would not always be in your best interest.
Another thing to think about is the terms of the refinancing agreement. This will typically be different depending on the provider. Usually, you can consult with one of their customer service providers or bankers if you are feeling truly lost on what to do or if you qualify. Often, though, it is not as complicated as it may seem based on a cursory glance.
The final things I will touch upon are the matters of your own credit score and your current level of income. Both of them will have a significant impact on whether this endeavor will be worthwhile for you. Unfortunately, if your credit score is worse than it was when you originally borrowed money, a refinancing plan may not work out in your favor.
See, interest rate offers tend to get better the more well off our credit scores are. If you are in a worse spot, then it is likely this sort of thing would have an inverse impact. Of course, income also is a determinant in this, so that can play a role in whether you are approved or not.
Overall, there is a lot to think about when it comes to refinancing and auto loans. They are a big commitment either way. However, if you are feeling like you would like to re-examine your initial contract and move to a different lender, there are plenty of options available for you. You can even look internationally, if that is something that interests you – sometimes we can find good rates externally as well as internally, after all!