At some point, many people think about refinancing their car loans. In some cases, it can even look like a great deal. The issue is, refinancing your car comes with pros as well as cons. If you’re wondering whether you should move forward, here’s what you need to consider.
The Pros of Refinancing Your Car
Usually, the pros of refinancing your car are easy to see. One of the biggest is that you may be able to secure a lower monthly payment.
When you refinance, you get a chance to choose a new loan term. If you extend out your repayment, you can shrink how much you have to put toward your loan each month.
Second, you might snag a better interest rate. Auto loan rates are lower now than in many previous years. Additionally, if your credit score went up, you may qualify for something better than you were eligible for when you made the initial purchase.
With a lower interest rate, you might be able to spend less in interest and secure a lower monthly payment. In some cases, you can even reduce your payment all without extending your repayment term, thanks to a rate reduction.
Finally, if you refinance your car loan for more than you owe, you may be able to use that extra cash for something else. This may help you with a financial emergency or let you handle something that’s otherwise unaffordable, like a car repair or home improvement project. However, this only works if you have enough equity.
The Cons of Refinancing Your Car
Refinancing your auto loan can come with drawbacks. First, you may have to pay several fees to secure a new loan. In some cases, the fees are sizeable enough to offset any interest savings you may capture or may cause you to pay more than you would have with your old loan.
Additionally, extending out the repayment term could lead you to pay more over the life of the loan in interest, even if you secured a rate reduction. For example, if you have $8,000 left on your loan, a 9 percent interest rate, and 36 months on your current term, you’ll pay $1,158 in interest during the rest of the repayment period.
If you refinance that $8,000 at 6 percent but extend the repayment over 60 months, you’d pay $1,280 in interest. That means you’ll actually spend more in interest, all while having the loan hanging over your head for longer.
Also, refinancing may impact your credit score. Hard inquiries can cause your score to fall, as well as lowering the average age of your accounts, both of which usually happen if you refinance.
Finally, refinancing could mean you’ll be upside down on your loan for longer. If that’s the case, even if you have insurance, you may not get enough to pay off your loan if your car is totaled. That can create a serious hardship.
Is Refinancing Your Car the Best Move for You?
Ultimately, whether refinancing your car is a smart move depends on your situation. Consider the pros and cons carefully. Then, make the choice that best meets your needs today and over the long term.
Can you think of any other pros and cons of refinancing a car? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.