Every money move impacts your ability to achieve long-term financial goals while keeping up with current costs, and for some people, refinancing their car loan might be one of the best things to do.
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While your rate, remaining loan balance and financial situation all influence whether this is the right choice for you, there are a few ways a refinance can strengthen your finances.
Free Up More Space in Your Monthly Budget
If you are tight on cash, refinancing your auto loan can be a great way to free up space in your monthly budget. Adding an extra one to two years to your loan term will spread the balance across more monthly payments.
A car will likely be your second largest expense, with your home being the most expensive item on your budget. Ramsey Solutions found that the average monthly payment for a new car is $748.
Although Ramsey would suggest steering clear of more debt, refinancing your car can trim the monthly payments and provide some extra breathing room. It can give you the financial flexibility to tackle high-interest debt, like credit card balances, more aggressively.
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Invest the Extra Money
For some people, it makes sense to refinance and invest the extra money that they would have committed to monthly loan payments. Saving $100 or $200 per month and putting it in a good index fund can outperform the additional interest you will have to pay on the auto loan.
This strategy is only viable if you do not need the extra cash to make ends meet. It’s even better if you have a high credit score and can qualify for a lower interest rate than what you are currently receiving. Car owners can benefit from securing lower APRs even if they aren’t interested in investing the difference. The lower the APR, the easier it is to outperform the interest rate with assets.
Don’t Refinance Too Often
Although refinancing offers a host of immediate advantages, such as a lower APR and a lower monthly payment, you should not rely on refinancing to keep up with expenses. Refinancing is a great tool if you are prudent with your extra money, but if it enables more impulse spending, then it’s not worth the potential benefits.
You should eventually look to get out of car debt for good. Picking up a side hustle can help you make ends meet, even if it is temporary. Refinancing once can be a power move, but relying on refinancing too often can signal bad money habits that need to be corrected.
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This article originally appeared on GOBankingRates.com: If You Do One Money Thing This Week, Refinance Your Car Loan — Here’s Why
