Auto loan refinancing: pros, cons and next steps
The cost of keeping your vehicle on the road every month is a challenge for many. As noted by Experian, drivers have faced increased monthly payments over the past year – an average monthly payment of $503 for used vehicles and $648 for new ones.
You can refinance your car loan — this is when you apply for a new loan to replace your current loan. Refinancing is a great option if your circumstances have changed and you’re looking to save money on your monthly payments. But this decision is not without risk, refinancing can increase rates and potentially cause you to lose your loan.
Benefits of refinancing your car
The advantages of refinancing your current car loan is all about saving money. Consider this to determine if refinancing is right for you.
Lower monthly payments
If you’re struggling to meet your monthly payments, refinancing can lower your costs and free up extra cash each month. You can do this by getting a lower rate, a longer term, or both. But although signing a longer term means you can save money on a monthly basis, it also means a higher total cost over the life of the loan.
Pay off your loan sooner
On the other hand, refinancing can also cause your loan to be paid off early. If you have seen a positive change in your income since you first signed your loan, it may be time to refinance on a shorter term. By paying off your loan early, your total interest paid will also decrease, saving you more money. To get the most out of your refinance, confirm with your current lender that there are no prepayment penalties.
Lower interest rates
Your interest rates make a huge difference in the amount of money you have to pay each month. This number is based on a variety of factors but is primarily affected by your credit score. So if your credit has improved since you took out your loan, now might be a good time to explore refinancing options. You will probably benefit from more advantageous conditions and rates.
Disadvantages of refinancing your car
Pressing the restart button on your refinance loan is not without risk. Consider these disadvantages.
If you are in a difficult financial situation, keep in mind that refinancing your loan comes with additional costs. These costs may include application, prepayment, title transfer and origination fees. Since fees can add up, be sure to calculate how much refinancing will cost and how the rate and term compare to your current loan.
Could get upside down
Being upside down on your loan means that the amount of your car is less than the amount you have left to pay on the loan. It is also known as being underwater. If you refinance and extend the term of your loan, you are more likely to find yourself in a situation where you owe more than the value of your vehicle.
High interest rates
Refinancing also carries the risk of higher interest rates. If your credit has gone down or interest rates have gone up, you could end up with a higher interest rate than your current rate. Shop around for different options to do your best to avoid exorbitant interest rates.
How to determine if refinancing your car is a good idea
The key to determining if refinance your loan is a good idea comes down to the amount of money you can potentially save. Weigh the pros and cons while enjoying a auto refinance calculator. Some situations where it might make sense for you to refinance include:
- Your credit has improved. If your credit score has improved since your loan was originally approved, you can likely qualify for more favorable terms and rates through refinancing.
- You jumped for dealer financing. Typically, the terms offered by dealerships are not the best available. Explore other loan options if you currently have dealer financing.
- You cannot make payments. Missing payments can result in charges, damaged credit or worse: repossession of the vehicle. If you can’t make payments, refinancing may allow for a lower monthly payment.
Before you refinance, consider whether you’ll really save money or just delay paying off your loan in full. If you are having financial difficulty, there is still alternatives to consider. But if refinancing is the right choice for you, discover the winner of Bankrate for the best auto loan option.