A car refinance is a big decision.
For some people, it opens the door to new opportunities – paying a lower monthly payment or reducing the interest rate on the car overall. For others, it could provide a way to consolidate some debt.
However, before you decide to refinance your vehicle, consider both the pros and cons of doing so. There are some drawbacks of a car refinance in some situations.
What Happens With a Car Refinance?
When you refinance your car loan, you obtain a new loan for a new lender to pay off the existing loan. Sometimes, your current lender will refinance with you, too.
The goal is to secure new terms, interest rates, or debt. You have to prove to the lender you are still creditworthy (you have a good credit score) and that you have the means to repay the debt.
Today, with interest rates so low, many people are benefiting from the process.
Pros and Cons of Refinancing Your Car
There are both pros and cons of a car refinance. Take some time to learn how a car refinance works, understand both sides of the coin and talk with several lenders before making a decision.
Here, we’ll go over the pros and cons of refinancing your car.
Pros of a Car Refinance
There are some benefits to refinancing. The process does not take long, and you can obtain a free quote to determine if these benefits apply to your case.
Here are several advantages of refinancing your car loan.
A Lower Interest Rate
By far the ideal benefit of refinancing the car loan is to secure a lower interest rate. A lower interest rate can help you save money on the cost of the loan.
If you had a poor credit score when you first purchased the car, your interest rate may be significantly lower than it is right now.
In addition, an individual who refinanced several years ago may also qualify for a lower rate because interest rates have fallen since they purchased the loan.
If the current interest rate you could obtain is one or more percent lower than what you are paying, consider refinancing. You will spend less overall to buy your car.
You Want to Consolidate Debt
Your vehicle is a valuable asset. As a result, it is possible to borrow against the value of it.
For example, if you own a car worth $12,000 but you only owe $8,000 on it, you may be able to borrow against that $4,000 value. You could use these funds to help you pay off debt or handle other financial needs.
In some situations, you can use this equity in your vehicle to pay off all of your credit cards (which typically have a higher interest rate than a car loan). This, too, can save you money.
You Want a Lower Monthly Payment
There are several ways you could obtain a lower monthly payment on the loan.
First, if you secure a lower interest rate, the monthly payment will be lower as well. This could help make your budget a bit easier to manage. How much lower depends on the debt you owe, the interest rate, and the term.
The second way to reduce your monthly payment is to extend the length of the loan. Some car loan lenders will extend the length of time it takes for you to pay off your loan to the original term.
For example, if you obtained a 5-year loan and have paid it off for the last 3 years, you only have 2 years to go. But, by extending it back to 5 years, the monthly payment is less.
You Want a New Lender
In some situations, the benefits of refinancing a car loan come down to convenience.
You may not like your current lender. Or, you could be ready to move into a financial institution rather than using dealer financing. If you want to change your lender, it is important to realize the applicable costs.
Cons of a Car Refinance
Refinancing is a process with costs attached to it. Before you agree to any type of offer, read through the information and know what you can expect to pay for this benefit.
Here are a few of the disadvantages associated with a car refinance.
The Cost of Refinancing
Like with most types of loans, some financial institutions charge closing costs and other fees to refinance. In some cases, these fees can add up.
When searching for a lender, find out about applicable car refinance fees. You’ll find that some, especially credit unions, charge no fees.
Your lender should provide you with a breakdown of the costs. Be sure that any planned savings (such as by reducing the interest rate) are actually more than the cost to refinance.
The Length Adds More Costs
There is more time for interest to apply to the debt if the car refinance has a longer loan length. As a direct result, you end up paying more for the loan than if you stuck with the current lender.
The longer the loan term, the more expensive the car refinance. However, this may still be beneficial if you need a lower monthly payment due to financial strain. In this case, paying a bit more over a few years may be better than trying to juggle a high monthly payment.
You Are Securing Your Debt
When you consolidate debt with a car refinance, the debt is linked to the vehicle. If you default on the car loan, they can force the sale of the car to repay the debt.
This is very much unlike credit cards and personal loans where if you default, it is harder for the lender to obtain payment from you.
Understanding the Pros and Cons of Refinancing Your Car
In every situation, it is up to you to determine which scenario is best for your needs.
Work with your lender to request a quote. Gather information about the costs involved in the process. Then, consider both the pros and cons of refinancing your car.
Could it help you save money or make your debt easier to repay over the long term?
For many people, a car refinance offers a bit of freedom, enabling you to pay off other debts. It also gives you a fresh start with a new lender.
There’s no risk in obtaining a car refinance quote to find out how you could benefit.