Pros & Cons of Refinancing Your Auto Loan
Many consumers take the first loan package they are offered at the auto dealership. While convenient at the time, you may regret the conditions of your auto loan once you’re on the payment path. Refinancing your vehicle loan is one way to potentially reduce your interest rate and monthly payments, saving money in the long term.
An auto-loan refinance involves taking out a new secured loan to pay off the existing one, transferring the title to the new lender. Ideally, the new loan conditions will be improved, but refinancing is not always the right choice.
Pros of Refinancing a Car Loan
- You could lower your interest rate: One of the best reasons to refinance a car loan is to lower your interest rate. If you previously had no credit or bad credit, it is worth checking into refinancing your car loan after a couple of years. Your credit score may have improved enough to qualify you for a lower interest rate. With a lower interest rate, you will be able to pay off your loan faster or save money over the course of paying off your loan.
- Increase your cash flow: If you currently owe less than what your vehicle is worth, you may be able to access more cash by refinancing. For instance, let’s say you have owned your vehicle for three years. Your vehicle is currently worth $8000 and you still owe $5000 on your auto loan. You need money for a small home improvement. One option would be to refinance your vehicle for $6500. You will still owe less than what the vehicle is worth and have $1500 after the new loan pays off your previous $5000 balance. The $1500 can now be used for your home improvement.
- Lower your payments by extending the loan: Sometimes a life changing event such as having a baby, unexpected medical expenses, or a natural disaster can put you in a situation where you absolutely have to reduce your monthly expenses. Refinancing can allow you to extend your loan. For instance, if you owe two more years on your current loan, it may be possible to refinance and extend the term to four years.
Cons of Refinancing a Car Loan
- You will pay more interest over the length of the loan: Sometimes you can refinance with a lower interest rate, but because the loan is extended you will actually pay more over the length of the loan. Use a loan calculator to make sure you know whether or not you are saving money overall. Getting the lower monthly rate might be what you are looking for, but if you really want to pay less overall it is important to do the math.
- Pay a higher interest rate: Getting cash fast is sometimes the only reason for refinancing a car loan. Beware of higher interest rates though, because most lenders charge higher interest rates on older vehicles. If you go to refinance your aging car, you might be surprised at the interest rate available to you. It is often a lower rate than a credit card though because your vehicle is being used as collateral.
You must take all your options into consideration and you need to do your research before refinancing a car loan. Shop around and see what interest rates are available. Think about your budget and the length of your loan. If you can, try to get the shortest loan term combined with the lowest interest rate.
Apply for an auto loan with Robins Financial before you shop and you will be armed with the knowledge of your monthly payment and total cost to finance the vehicle of your choice. Apply online, by phone, or visit any of our branch locations.