Pros and Cons of Refinancing a Car
There are many reasons why you might consider refinancing a car loan. It can be a huge monetary help in the short term, lightening your load and making car payments feel a little bit more doable. But refinancing your vehicle is a major decision that requires careful consideration before you even begin the paperwork.
While there are many ways in which a refinance can help you out of a tight spot, it can be all too easy to find yourself paying more money than is necessary and ending up in deep water.
It’s important that you weigh all the costs and benefits of refinancing a car loan before deciding if it’s the right decision for you. CoPilot is here to help. In this article, we’re going to show you everything you need to know about the pros and cons of refinancing a car.
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How to Refinance a Car
Refinancing a car essentially means using a new loan to pay off your old loan. You will take out a second loan and use that to cover the cost of the first, which will give you a new interest rate, APR and pay-off timeline.
Your refinanced auto loan will be taken out at the same institution as your original, most typically a bank or the car dealership itself.
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When to Refinance a Car
Borrowers need to be careful about when they take out a refinanced auto loan, as you might find yourself in deeper water than before. Here are a few questions to ask yourself that will help you decide if it’s the right time to refinance your auto loan.
- Has my credit score gone up? If your credit score has improved, this will positively affect the APR rates you can qualify for, which may reduce the overall cost of your loan repayment. If your credit score has gone down or stayed the same, your APR prospects will be unchanged or even worse.
- Can I afford to make current car payments? If you are unable to make payments on your current loan, you may be able to extend the loan term and reduce the monthly rate to a price which is more realistic for your financial situation.
- What are loan rates like? If interest rates have gone down or improved since you took out your first loan, it might be a good financial move to refinance and take advantage of the lower numbers. This can save you lots of money in the long run.
- Do I like my lender? If you find doing business with your current lender frustrating, unpleasant, or simply difficult, it is totally reasonable to take your loan elsewhere. Just make sure doing so won’t be a financial hardship for you.
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Pros and Cons of Refinancing a Car
Let’s dive into our list of the pros and cons of refinancing a car.
- Pro: you might get a better interest rate. If you refinance your vehicle at the right time, you may qualify for a better APR and ultimately pay less in interest on your vehicle loan.
Refinancing with a better credit score than when you began is a wise financial decision and can knock thousands of dollars off of your grand total. If you’ve made loan payments diligently and on-time up to this point, it’s possible that that will have helped to improve your credit score already. Shop around for rates before you make any decisions. * Con: you might have to pay fees. Refinancing your vehicle is not typically something you can do for free, and you should expect to pay refinancing fees in order to make it happen.
These can include upfront costs, transfer fees, exit fees, and sometimes all three in tandem. It all depends on who you borrow from, so make sure to take fees into account when looking into your refinancing options.
Some organizations charge exorbitantly for refinancing to discourage customers from doing so, and this could tack on an unpleasant amount to your final bill. * Pro: you might be able to get some cash. If you are in what’s called “positive equity,” you might be able to use a refinance to get some cash to help you out with a project, separate payment, or bills for the month.
If your car is worth more than the money you still owe on your auto loan, you can refinance for an amount worth more than your leftover payment, but less than the car, and keep the leftover cash for yourself.
For example, if your car is worth $10,000 and you still owe $5,000, you can refinance for $8,000 and hold onto the leftover $3,000. * Con: you might end up paying more interest. Depending on the nature of your refinancing terms and the state of your credit, you could pay far more in interest than originally planned.
If you opt for an extended loan to make your monthly payments more manageable, even if your interest rate is very low or lowered from your original rate, the longer life of the loan gives it more time to collect interest, and may have you taking more out of your pockets in the long run. * Pro: lower payments. If you are smart about when and how you do your refinancing, you could both lower your monthly payments and your interest rate, and ultimately end up paying less on the refinanced loan overall.
Even if you do end up paying more over the lifetime of your loan, for many borrowers with a changed financial situation, a lower monthly payment can be a huge relief and might be worth a larger bill at the end of the loan term. This will certainly free up your cash for other aspects of your day-to-day life. * Con: you could go underwater. This is one of the weightier notes on our list of the pros and cons of refinancing a car. This means that you end up paying more on your auto loan than the vehicle is actually worth.
Your car will depreciate in value the longer you have it, and paying more may not be worth it if you have a vehicle which has a poor resale value or if you are involved in an accident which damages the worth of your vehicle.
Going underwater is a particular risk if you choose to increase your cash flow with a refinanced loan and end up borrowing and owing an amount well beyond the vehicle’s original cost. Do your best to avoid going underwater at all costs.
Get a Curated List of the Best Used Cars Near You
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