Should You Refinance Your Company Car?

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Amid an uncertain economy, inflation, and the aftermath of the COVID-19 pandemic, you might wonder whether you should refinance your company car.

According to RateGenius’s “State of Auto Refinance: 2022” report, car owners saved about $1,158 annually after taking out a new auto loan in 2021 – a 16% increase from 2020.

However, refinancing has pros and cons – and determining whether it’s the right move for you is essential to tapping into its financial benefits. The following guide will explain the advantages and disadvantages of refinancing your company car so you can make the best decision.

What Does It Mean to Refinance a Car?

Refinancing a car means replacing your original loan with a new one under different terms. For some people, refinancing can save them quite a bit of money.

You can match the refinanced loan’s duration to your current loan or take one out that’s longer or shorter. Ultimately, it depends on your needs.

Often, borrowers decide to extend their repayment period to take their time paying off debt. Be cautious, though – you can expect this method will significantly decrease any savings you might receive when you refinance.

Advantages and Disadvantages of Refinancing Car Loans

You can save hundreds or thousands of dollars by lowering your interest rate by even one percentage point. While this may sound enticing, refinancing doesn’t always make sense.

When deciding whether or not to refinance your company car, you must factor in the following advantages and disadvantages.

Advantages

Of course, the ultimate goal of taking out a new auto loan is to save money. Here are four advantages of refinancing a car.

  1. Lower Monthly Payments

Refinancing your company car can reduce the monthly costs if you struggle to cover your auto loan payments. Some lenders help car owners lower prices by an average of $150 per month.

When you reduce the monthly payments for your auto loan, you can allocate your finances to pay off other debts. This is particularly beneficial to those who’ve landed in dire financial situations or reduced income.

Remember that while refinancing can lower your monthly payments, it could extend the terms, in which case you’ll likely need to pay additional interest over the loan’s life.

  1. Pay Less Interest

Are interest rates fluctuating amid market conditions? When interest rates are low, it may deliver excellent savings when you refinance.

After taking out your original loan, you may have realized that you’re eligible for a lower interest rate than you got or were able to improve your credit score.

In this case, refinancing may be worth it. Pay attention to when interest rates dip to take full advantage of auto loan savings.

  1. Pay Your Loan Off Sooner

You can refinance your company car to shorter terms and a lower interest rate when business is going well, allowing you to repay the loan sooner.

Obviously, paying extra on your current loan also speeds up the process. However, refinancing could help you save more money.

  1. Cash Out on Positive Equity

Does your car’s market value exceed the amount of your original loan? With positive equity, some lenders may offer a more favorable rate with cash-out refinancing.

Cash-out refinancing enables you to cash out the difference between the original loan amount and the new one. The amount derives from the equity value you’ve built since purchasing the car.

You can use your cash-out payment for whatever you like, such as renovating your home or other financial purposes.

Disadvantages

Refinancing your company car may not be the best option. Here are some of the disadvantages of taking out a new auto loan.

  1. May Pay More Interest

You’ll likely pay more if you’re refinancing a longer loan term for lower monthly payments. This is because of the extra months of interest you’ll need to pay.

A lower rate doesn’t necessarily mean you won’t have to pay interest for an extended period.

  1. Could Be Responsible for Fees

You shouldn’t refinance a car if the original loan has prepayment penalties, as you’ll likely have to pay that out with a new loan. Likewise, you risk lowering your credit score when refinancing after taking out other loans, such as a home mortgage.

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Some states issue fees for re-registration and title transfers, too. You may also need to pay for a new auto loan application. Do the math to estimate whether the fees amount to more than your savings when refinancing.

  1. Upside Down on Loan

You should avoid refinancing if you owe more money than your vehicle is worth – having negative equity is what lenders refer to as being “upside down.”

For instance, when you’re upside down on your loan, you’ll have to pay the lender the difference when you sell or trade the company car. In some cases, this could amount to thousands of dollars.

Practice due diligence by researching your vehicle’s make, model, and year for its current value. Resources like the National Automobile Dealer’s Association (NADA), Edmunds, or Kelley Blue Book (KBB) are good places to start.

When Should You Refinance a Car?

Although there isn’t a set timeframe for refinancing your car, most lenders have you wait around for six months before allowing you to take out another loan. Of course, some lenders don’t specify a waiting period.

If the market conditions produce lower interest rates than your original auto loan, it could be the right time to refinance. Likewise, lenders may offer a lower rate if you’ve improved your credit score since your original loan.

An inability to make monthly payments indicates an ideal time to take out a new loan with lower costs. Life happens and sometimes we have unexpected expenses, such as sudden unemployment or expensive medical bills. As was mentioned, reducing your monthly payments can free up funds to pay for the necessities.

Finally, if you’re unhappy with your current lender, it could be time to look for someone new to manage your auto loan. Ultimately, when to refinance your company car is a personal decision.

How Do You Refinance Your Company Car?

Before refinancing, the bank must receive the title or certificate of ownership from the dealership or previous owner – this process could take some time.

You can prepare to apply for a new auto loan by collecting the necessary documents, such as identification information, proof of employment, and anything else detailing your current loan terms. You should also evaluate your credit history to determine if your credit score went up.

Lenders will run a credit check and ask for recent pay stubs and W-2s – usually for two years and sometimes for three or four – to ensure you can make monthly payments. If you’re self-employed, you’ll also need to provide 1099 forms for the past three or five years.

Refinance Only If It Makes Sense

It’s crucial to weigh the advantages and disadvantages before refinancing your company car. Conditions must be justified if you’re interested in lowering your monthly payments or paying off your loan faster. Understand what you’re committing to before you sign on the dotted line, and only do so if it makes sense for your unique situation.

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