Knowing whether to refinance a recreational vehicle such as an RV or boat can be tough. In this article, we’ll go over everything you need to know to make an informed decision regarding refinancing rates in 2023, including what plan is right for you and whether now is a good time to do it. Let’s get started!
Simply put, refinancing (or “refi” for short) is replacing an existing loan with a new one. It involves getting a new loan for however much you still owe on the old loan. This can be done for mortgages or vehicle loans.
The goal of refinancing is to help you save money in the long run. That’s why many do it when interest rates have gone down or their financial situation has improved (e.g. their credit score or income increased). But there are many other factors to consider as well.
- Interest rates. This is perhaps the biggest reason people refinance. If interest rates fall significantly, it may mean you can get a better rate on your loan to lower your monthly payments and the overall cost of the loan. However, the reverse is also true. If interest rates go up, you may be better off not refinancing.
- Credit score. Your credit score plays a major role in determining the terms of your loan. If your credit score has improved, you may want to refinance to see if you can qualify for a better interest rate, for example.
- Loan origination and refinancing fees. Lenders typically charge a loan origination fee for processing a new loan application. It’s usually a percentage of the overall loan, such as 1%. Similarly, lenders charge fees for refinancing. These include various costs for application fees, appraisal fees, title search and insurance fees, and credit check fees.
- Prepayment penalties. A prepayment penalty is a fee some lenders charge if you pay off all or part of a loan early. You must check to see if your current loan terms have a prepayment penalty and, if so, whether refinancing is worth it.
- Vehicle condition. When it comes to refinancing RV loans, the condition of your vehicle (which serves as collateral on the loan) will impact lenders’ willingness to offer you a new loan. If the vehicle is in poor condition, for example, they may not offer you a new loan because the risk of not recovering its full value is higher.
- Equity position. Your equity position refers to how much of the vehicle you own vs. your outstanding loan balance. If the current value of the vehicle is higher than the outstanding loan balance, you could potentially get cash by refinancing (aka cash-out refinance). Just know that this requires borrowing against your equity and will increase your loan balance. Conversely, if your outstanding loan balance is higher than the vehicle’s current value (aka being underwater), you may have trouble qualifying for refinancing.
- Loan term. Vehicle loans can be long-term or short-term. Most are anywhere between three and twenty years. When you refinance, you could potentially shorten the loan term in exchange for higher monthly payments. Alternatively, you could increase the loan term for smaller monthly payments. However, this may also increase the total interest you pay over the life of the loan.
- Future plans. Consider how long you plan to keep the vehicle. If you plan to sell it within the next few years, refinancing may not be worth it. However, if you want to keep your vehicle for a long time, getting a new loan could be a great way to lower its long-term cost.
Ultimately, a good time to refinance will vary from case to case. However, it’s generally a good time to refinance when interest rates are lower, your personal financial situation has improved, and you don’t plan to sell anytime soon.
You shouldn’t refinance if the total cost of refinancing is more than what it would cost to keep the loan you have now. This can be difficult to calculate given the many variables at play. However, if you consult an experienced financial advisor, they can help you understand which is the better option. Generally, if interest rates are higher than your current loan’s interest rate, it’s a bad time to refinance.
On May 3rd, the Federal Reserve raised its benchmark for interest rates for the 10th consecutive time.
Specifically, the Fed raised it by 0.25% to a target range of 5.00% to 5.25%. That means now may not be the best time to refinance since loan rates are bound to follow suit. The interest rate you have now is most likely better than what you’d get on a new loan.
For example, the starting APR for RV loans in May 2023 range from about 7% to 20%. So, unless you think those rates are better than what you have now, you should probably stick to your current loan.
That said, the Fed also signaled that this might be their last rate hike for the time being since inflation has started to cool and there are concerns about putting too much pressure on struggling banks. Even though 2023 may not be the best time to refinance, you may want to strategize your monthly payments to take advantage of lower interest rates in future years.
For example, you may want to opt for a longer loan term (10+ years) now, so you have more outstanding loans to refinance when interest rates do eventually come down. Consult a financial professional to determine what makes the most sense for your financial situation.