Pros & Cons of Refinancing Your Auto Loan
When buying a car, many buyers accept the loan package they are offered at the dealership. Though convenient at the time, you may later come to regret the conditions of your auto loan once you’ve started making payments. Refinancing your auto loan is one way to get better terms and potentially reduce your interest rate and monthly payments, helping you save more money. An auto loan refinance involves taking out a new loan to pay off the balance of your existing loan, and transferring the title to the new lender. While refinancing your auto loan can improve your overall finances, it may not always be the right choice for you. There are a few things to consider before applying for an auto loan refinance.
Pros of Refinancing an Auto Loan
- Lower interest rate: One of the best reasons to refinance a car loan is to lower your interest rate. A lower interest rate can help you save money on the cost of the loan over time. If you previously had bad credit or even no credit and your credit has since improved, it can be worth looking into refinancing your auto loan to see if you may now qualify for a better interest rate. Or, rates in general may be lower than when you originally purchased the vehicle. If the rate you could qualify for is 1% or more lower than the rate you are currently paying, consider refinancing. A significantly lower interest rate will help you pay your loan off faster.
- Lower monthly payments: If you need to free up more room in your monthly budget, refinancing your auto loan can help you reduce your monthly expenses by extending the loan. Lengthening the life of the loan by 1-2 years can significantly lower your monthly payment. Even though it will take longer to pay off the loan in the long run, and you will pay more interest over the life of the loan, it will give you the needed wiggle room in your monthly finances in the short term.
- Pay off your loan earlier: Some people may have the financial flexibility to continue making loan payments, but they also may want to get out of debt sooner. When you refinance your auto loan, you can request a loan with a shorter duration and become debt free sooner. This strategy will most likely increase your monthly payments, but some borrowers want to get it over with and get rid of their loan debt sooner. Or, receiving a lower interest rate when you refinance may free up enough extra room in your monthly budget that you can afford to put extra money toward your loan to help pay it off faster.
Cons of Refinancing an Auto Loan
- Paying more in interest: If you extend the term of your loan, you will end up paying more interest over the life of the loan. Use our auto loan calculators to help you determine if you will end up saving enough money overall for refinancing to be a good choice.
- Paying a higher rate: Freeing up cash fast may sometimes be the only reason for pursuing a refinance. But be careful of higher interest rates. Many lenders charge higher rates on older vehicles, starting anywhere from 5-10 years old. If your car is older, you may be surprised the interest rate you qualify for now compared to when you first financed the vehicle.
- You could be upside down on your loan: A car’s value depreciates quickly, but the principal on your loan will remain the same. A refinance can put you upside down on your auto loan, meaning that the loan’s principal exceeds the car’s value. Some borrowers can accept this short-term sacrifice as they continue making loan payments, however, an upside-down loan can complicate efforts to sell your vehicle. If you sell your car for $25,000 but owe $28,000 on the loan, you will be stuck coming up with the remaining $3,000 to complete the sale.
The Bottom Line
It’s important to consider all of your options and do your research before deciding you are ready to refinance. Shop around for interest rates so you can be sure you are getting a good deal that will help you save money. Also consider the length of the loan, and try keep it as short as you are able to with your budget. Try to find the shortest loan term combined with the lowest interest rate to ensure you are getting the best deal possible on your auto loan refinance.
Refinance and save with Robins Financial to drive home your savings. To find out how much you could save, give us a call or request an appointment at any of our branches. If you’re ready to refinance, apply online today.
- Do you want to estimate how much your auto loan’s monthly payment will be? Try using our Auto Loan Monthly Payment Calculator.
- View our Auto Loan Rates to see which loan term and rate might best suit your financial needs.
At Robins Financial Credit Union, our mission is to enhance the financial well-being of our members and community. We honor this commitment by providing educational content to help you make the most of your finances. Read our other blog articles to help you gain the financial knowledge you need to succeed.