Are you thinking about refinancing your car to get a more affordable monthly payment? Or maybe you believe you can qualify for a lower interest rate or prefer a shorter loan term to pay the loan off faster. Regardless of your motivation for wanting to refinance your ride, there are benefits and drawbacks worth evaluating to make an informed decision.
What Is Car Refinancing
Car refinancing entails swapping your existing car loan with a new one to get a better interest rate, lower monthly payment or both. When you get approved, your new lender will pay off the balance of your current loan, and you’ll commence repayment, but on the new loan until it’s paid off.
Pros Of Refinancing Your Car
There are several advantages to refinancing your car loan.
You Can Get A Lower Interest Rate
You could qualify for a lower interest rate if your credit score has improved since you took out your current auto loan. This is also the case if rates have decreased due to market conditions. Depending on how low of a rate you qualify for, you could save several hundred or thousands of dollars over the loan term.
You May Lower Total Interest Paid
A lower interest rate also means you could pay far less in interest over the life of the loan. But, of course, the amount you’ll save depends on the repayment period of the new loan you refinance into.
You Want To Lower Your Monthly Payment
The lender could offer you an extended repayment period to lower the monthly payment when you refinance your car. This could provide some much-needed relief to your wallet if you need to free up funds to meet other more pressing financial goals.
You Can Pay Off Your Loan Sooner
It’s also possible to pay off your loan much sooner by refinancing your ride. But you’ll need to secure a lower interest rate, keep the same loan term or request a shorter loan term. You’ll also need to continue to make the higher monthly payment you had before you refinanced (or more if you can afford it) to reach the finish line faster.
You Can Get Some Cash From Equity In Your Car
Some lenders will let you borrow against the equity you’ve built up in your vehicle. You can calculate your car’s equity by subtracting your outstanding auto loan balance from what it’s worth. To illustrate, if you owe $17,000 on a car worth $27,000, you could get a new loan for $20,000 and keep the $3,000 in cash. Be mindful that there are restrictions on these types of loans, and each lender has its own set of rules and eligibility requirements.
Cons of Refinancing Your Car
Unfortunately, there are also disadvantages to refinancing your car that are worth considering.
You May Have To Pay Refinancing Fees
Depending on where you refinance your car, you could pay fees to finalize the transaction. You could also be on the hook for prepayment fees if your lender assesses a penalty for paying the loan off early. If the cost savings are minimal, you could be better off keeping your current auto loan.
You May Pay More In Total Interest Over Time
As mentioned earlier, you could get a lower monthly payment if the lender stretches out your loan term. The downside is that the lender will also have more time to collect interest from you, which means you could pay more over the loan term.
You May End Up Upside-Down On Your Loan
If you refinance to get an extended loan term or pull equity out of your vehicle, you risk being upside-down on your loan. This means your car is worth more than you owe, and it can be pretty challenging to get it off your hands if you want to sell it in the short term. You’ll be forced to pay the lender the difference in cash or trade it in and roll the remaining balance into a new car loan.
Where You Can Refinance Your Car
If the benefits outweigh the costs, refinancing your car loan could be a wise financial decision. Be sure to run the numbers to determine if it’s a viable option.
If you decide to move forward, consider an online platform to help you get the best deal on vehicle refinancing.
