Reasons to Refinance
Refinancing helps you out by reducing your interest rate and the total amount that you pay towards your loan.
An example: Let’s say that you buy a car for $15,000 with a 7% interest rate, with a loan term of five years. If you don’t refinance, you will end up paying a total of $17,821 towards the vehicle, which is over two thousand dollars more than what you originally paid for it! Let’s say that after one year paying 7% interest, you have put $3,564 towards the principal and interest of your auto loan. You still have $11,436 due, and want to lower the amount that you pay towards interest. So you refinance your loan and secure a 2% interest rate. With this new interest rate, you will end up paying a total of $11,909 towards your remaining loan.
Let me break it down visually:
7% Interest Rate
5 Year Term
If you stick to the same loan term and interest rate, you will pay $17,281 for your car over the course of five years.
Let’s say that you stick with the loan for one year, paying $3,564 towards the balance and interest. You then decide to refinance the remaining $11,436 that you owe on your car.
2% Interest Rate
$11,436 Refinanced Loan
4 Year Term
If you add what you paid towards your car during the first year to the refinanced loan balance and interest paid over the course of four years, you will have paid a total of $15,473 towards your car! If you didn’t refinance, you would have paid almost two thousand dollars more for your car; that is enough extra cash to take a nice weekend vacation!
If you aren’t sure how your interest adds to your balance over it, check out Credit Karma’s loan calculator.
Have you ever refinanced a loan before? Share your experience in the comments section!
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