What is the pros and cons of refinancing an auto loan? Over the last decade, the rising cost of new and used cars has driven up the number of the average automobile loan. to make up for this, auto lenders have started offering longer car loans that allow consumers to borrow more with a lower monthly payment.
If you’re on the fence about refinancing your car loan, it helps to understand how this move could help you or hurt you. Here’s everything you would like to understand.
Top 3 Pros of Refinancing an Auto Loan.
Pros #1: You’ll secure a lower monthly payment.
Depending on the main points of your initial loan, it’s possible refinancing your auto loan could secure a lower monthly payment you’ll be able to more easily afford. this could be important if you’re struggling to keep up with your payment as it stands, or if you only need more flexibility in your monthly budget.
With a lower monthly payment, it would be easier to stay on top of your living expenses and other bills. And if you plan to keep your car for the long term, you will not mind extending your repayment timeline in order to lower your payment monthly.
Pros #2: You may get a much lower interest rate.
Another potential advantage of refinancing is that the fact you would possibly be able to qualify for a lower rate of interest. If that is the case, refinancing your car loan could save you hundreds — or maybe thousands — over the life of your loan.
Imagine your current car loan balance is at $15,000 and you have a 19 percent APR and 48 months left on your loan. From now forward, you’d pay an extra $6,528 in interest before your loan is paid off in four years.
If your credit score has improved, however, you would possibly qualify for a brand new car loan with a much better rate. By refinancing into a brand new 48-month auto loan at 9 percent APR, for example, you could reduce your future interest costs by more than half to just $2,917 while lowering your monthly payment in the process.
Pros #3: Tap into any equity you’ve got.
Refinancing your car loan also can help you tap into any equity you’ve got in your car. this could be a lifesaver if you wish money for emergencies or simply want to consolidate debt at a lower rate of interest.
Just remember that, as highlighted above, refinancing could mean more interest paid over time — even if you get a lower rate.
Top 3 Cons of Refinancing an Auto Loan.
Cons #1: You’ll extend your repayment timeline.
Getting a lower monthly payment can be a boon for your finances but do not forget you will likely be stuck paying on your auto loan for months or years longer than you’d have otherwise. And this could create unintended financial consequences later down the road.
This is especially true if you’re extending the loan on a second-hand car that’s already several years old. you may be stuck making payments on an older vehicle that breaks down and requires pricey repairs. this might be a double whammy for your finances later — even though refinancing saves you money on the front end.
Con #2: You would possibly pay more interest over the life of your loan
Before you’re taking steps to refinance your car loan, make certain you run the numbers with a car loan calculator so you’ll compare your total interest costs. Securing a lower rate of interest or lower monthly payment could also be a much better deal in the short term, but you’ll wind up paying more interest on your loan due to a lengthier timeline.
Cons #3: Refinancing isn’t free
Finally, do not forget that refinancing your auto loan typically comes with fees. These fees will vary depending on the auto lender you work with, but they will include an application fee, an origination fee, and an auto lien transfer fee.
Also, make certain to check that your initial auto loan doesn’t charge any prepayment penalties that may come into play if you refinance your loan.
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