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Refinancing a car loan can have several advantages, such as lowering your monthly payment, lowering your interest rate, or extending the loan term.
Paying lender fees and extra interest if you extend the loan term or cash out auto equity are drawbacks of refinancing an auto loan. You could also end up owing more than your car is worth.
Here are some advantages and disadvantages to weigh when determining if refinancing your auto loan is worth the time, effort, or savings.
So, you’re wondering if refinancing your car loan is the right move for you? It’s a big decision and there are a lot of factors to consider. But don’t worry, we’ve got you covered. In this comprehensive guide we’ll delve into the pros and cons of refinancing your car loan, helping you determine whether it’s a worthwhile endeavor.
Let’s face it, nobody enjoys paying interest on a car loan. It feels like you’re throwing money away, and who wants that? Refinancing your car loan could potentially save you thousands of dollars in interest payments, freeing up that cash for other important things in your life
But before you jump on the refinancing bandwagon, it’s crucial to understand the potential downsides Refinancing can sometimes come with fees and could extend the length of your loan, meaning you’ll be paying interest for a longer period.
So, how can you determine whether refinancing is the best option for you? Let’s weigh the benefits and drawbacks so you can make an informed choice.
Pros of Refinancing Your Car Loan:
1. Lower Interest Rate, Lower Payments: This is the big one. If you can secure a lower interest rate through refinancing, you could significantly reduce your monthly payments, saving you a substantial amount of money over the life of the loan. This extra cash could be used to pay down other debts, build your emergency fund, or simply enjoy a little more financial freedom.
2. Improved Credit Score: Refinancing can be a great way to boost your credit score, especially if you’ve significantly improved your creditworthiness since you took out your original loan. A higher credit score can lead to better interest rates on future loans, including mortgages and credit cards.
3. Shorter Loan Term: If you’re looking to pay off your car loan faster, refinancing to a shorter term could be a good option. This will result in higher monthly payments, but you’ll be debt-free sooner and pay less interest overall.
4. More Flexibility: Refinancing can give you more flexibility with your loan terms. It may be possible for you to select an alternative repayment plan, modify the due date, or even include or exclude a co-signer.
Cons of Refinancing Your Car Loan:
1. Fees: Refinancing typically comes with fees, such as application fees, origination fees, and prepayment penalties. These fees can vary depending on the lender, so be sure to factor them into your calculations before refinancing.
2. Extended Loan Term: While a longer loan term can mean lower monthly payments, it also means you’ll be paying interest for a longer period, ultimately paying more in the long run.
3. Negative Impact on Credit Score: Refinancing can temporarily lower your credit score due to the hard inquiry on your credit report. However, this impact is usually short-lived and should be outweighed by the long-term benefits of a lower interest rate.
4. Loss of Equity: If you’re underwater on your car loan (meaning you owe more than the car is worth), refinancing could put you further underwater. This could make it more difficult to sell or trade in your car in the future.
When Does Refinancing Make Sense?
Now that you understand the pros and cons, let’s explore some scenarios where refinancing your car loan might be a wise decision:
1. Interest Rates Have Dropped: If interest rates have fallen since you took out your original loan, refinancing could save you a significant amount of money. Even a small drop in interest rate can make a big difference over the life of the loan.
2. Your Credit Score Has Increased: If your credit score has increased considerably since you obtained your first loan, refinancing could be able to get you a much lower interest rate. This could lead to substantial savings and lower monthly payments.
3. You Can Get a Shorter Loan Term: If you’re financially able to handle higher monthly payments, refinancing to a shorter loan term could save you a lot of money in interest charges.
4. You Need Lower Monthly Payments: Refinancing to a longer term may be able to give you much-needed financial relief if you’re having trouble making your current car payments. But remember that over time, you’ll have to pay more interest.
When Should You Hold Off on Refinancing?
While refinancing can be a great way to save money, it’s not always the right move. Here are some situations where you might want to hold off:
1. You’ve Already Paid Off Most of Your Loan: If you’re close to paying off your original loan, refinancing probably won’t save you much money. The interest you’ll save on a refinanced loan may not be enough to offset the fees associated with refinancing.
2. If your vehicle is old or has a high mileage, it’s unlikely that a lender will refinance it. Furthermore, it’s possible that your car’s value has decreased dramatically, which makes it challenging to refinance for a sizable sum.
3. The Fees Outweigh the Benefits: Before making a choice, make sure to account for all refinancing fees. Even if you can get a lower interest rate, it might not be worth refinancing if the fees are high.
4. You’re Planning to Apply for More Credit Soon: Refinancing can temporarily lower your credit score. If you’re planning to apply for a mortgage or other major loan in the near future, it might be best to wait on refinancing until after you’ve secured the new loan.
Making the Right Decision for You
Ultimately, the decision of whether or not to refinance your car loan is a personal one. There’s no right or wrong answer, and the best choice for you will depend on your individual financial situation and goals.
Here are some additional factors to consider:
- How much money can you save by refinancing?
- What are the fees associated with refinancing?
- How will refinancing impact your monthly payments?
- How will refinancing impact your credit score?
- What are your long-term financial goals?
By carefully considering these factors, you’ll be well-equipped to make an informed decision about whether or not refinancing your car loan is the right move for you.
Additional Resources
- NerdWallet: Refinancing a Car: What Are the Pros and Cons?
- Credit Karma: When Does Refinancing a Car Loan Make Sense?
- Bankrate: Is It Worth It to Refinance Your Car Loan?
You might have to pay fees
Your state may charge fees to re-register your car or transfer the title. And your refinance lender could have application or origination fees. Prepayment penalties for paying off your loan early may also be assessed by your current lender, though they aren’t as prevalent as they once were. Compare your total in fees with the amount you will save from refinancing.
Cons of refinancing your car loan
Refinancing to a longer loan term in an attempt to lower your payment could result in you paying more money overall due to the extra interest you would pay for the extra months. The cost of carrying on with interest payments for an additional year or two might not be offset by even a lower rate.
Should I Refinance My $13,000 Car?
FAQ
Is it ever a good idea to refinance your car?
What are the disadvantages of refinancing a car?
Does refinancing a vehicle hurt your credit?
Does refinancing a car start your loan over?
Should I refinance my car loan?
Auto loan refinancing is generally a good idea if it allows you to save money on interest. But it’s not always a wise financial move, especially as interest rates continue to rise, so think carefully before applying. Use a car loan refinance calculator to see how much refinancing can save you. When
What happens when you refinance a car?
When you refinance your car, you take out a new auto loan to pay off an existing car loan. The new loan will likely come with a different interest rate and term. You will pay the new lender in fixed monthly installments as you did with the old lender.
Why should you refinance a car?
The reasons for refinancing a car vary. If your credit has improved since you took out the original loan, or a dealership stuck you with a too-high interest rate, refinancing may lower your rate and reduce the total amount of interest you pay. If you’re struggling to make monthly car payments, refinancing can also decrease your payments.
Should you refinance a car if interest rates are high?
Higher interest rates — You may not want to reconsider refinancing if today’s interest rates are measurably higher than the rate on your current car loan. An older car — Lenders are leery of refinancing older cars. If your car is more than 8 or 10 years old, the odds of finding a lender to refinance it will be tough.