Refinancing a car loan might reduce your monthly payment, interest rate, or loan duration.
Fees, extra interest if you extend the term or cash out equity, and owing more than the car is worth are drawbacks of auto loan refinancing.
Consider these pros and downsides.
Car Refinancing Pros
- Interest Might Be Lower
If you had bad or no credit when you bought your automobile, your credit may have improved. This is true if you’ve made on-time payments for 6-12 months. Also, interest rates may have been reduced or you may have accepted a higher rate to get a better automobile bargain.
If you can cut your loan rate by 1% or more, refinancing may be advantageous.
- Reduce Your Monthly Payment
Refinancing might lower a too-high auto payment. A reduced payment might free up money for higher-interest loans. It can help you overcome financial difficulties, including an unexpected income loss.
Refinancing to a lower interest rate might help you avoid getting behind on payments. To reduce payments significantly, you’ll need to prolong the loan’s duration, which will increase interest costs.
- Early Loan Repayment Is Possible
If your income has increased since you bought your automobile, try refinancing to a shorter term and cheaper interest rate. You might pay extra on your auto payment, but refinancing could transfer more money to principle, saving you more.
- Car Equity Can Be Tapped
If you need cash, a cash-out vehicle refinancing loan may be an option (the value of your car minus the amount you owe on it). If your automobile is worth $20,000 and you owe $10,000, you might refinance for $15,000 and earn $5,000 cash. Cash-out refinancing has restrictions and drawbacks, so use it only in emergencies or to pay off high-interest debt.
Car Refinancing Cons
Most refinancing borrowers pay less interest, have no fees, and pay off debt faster, but these benefits aren’t guaranteed.
- Interest Might Rise
If you refinance to a longer loan term to lower your payment, you may pay more overall in interest. Even a lower rate may not cover the expense of extra interest payments.
- Fees May Apply
Ask your lender about prepayment penalties. Reregistering or transferring your car’s title may cost you. Most refinancing lenders don’t charge application fees. Compare refinancing fees versus savings.
- You Might Flip
Refinancing to prolong your term or withdrawing equity might put you upside-down on your loan. If you sell or trade-in your automobile, you’ll owe the loan thousands of dollars.
How To Decide Whether To Refinance Your Automobile?
- Set goals. Want to cut your monthly payment, acquire emergency cash, or pay off your debt faster? Knowing your goals helps when refinancing and running figures.
- Request refinancing. Compare refinancing lenders to determine your interest rate and conditions.
- Use our auto refinance calculator to discover how refinancing will affect your monthly payment. See how much refinancing will cost or save you, including interest.
Before refinancing your automobile, consider the advantages and downsides. Even if you need emergency cash, read the tiny print and know the cost.
