If you’re feeling overburdened by your monthly car payment, refinancing your auto loan might be a good solution. Refinancing could help you save money by lowering your monthly payments or interest rate.
It can also help you pay off your car more quickly. However, refinancing has potential drawbacks, like going upside-down on your loan and increasing your interest rates. Before you decide to refinance, it’s important to weigh the pros and cons.
Interested in finding a new auto loan that works for you? Compare rates with ease from lenders below.
How Does Refinancing an Auto Loan Work?
Refinancing an auto loan means that you’re getting a new loan to replace your old loan. In most cases, refinancing allows you to get a new loan with a lower monthly payment, a lower interest rate, or a longer loan repayment period. All of these can help you save money. When you refinance, your new lender pays off the original lender, and you get out of the original loan. Then, you start making monthly payments on the new loan, per the terms of your agreement.
Three Ways Refinancing an Auto Loan Can Save You Money
If you want to save money on your auto loan, refinancing can be a good tool. Here are a few ways that refinancing your auto loan can help.
1. Lower Your Monthly Payments
The main advantage of auto loan refinancing is the opportunity to lower your monthly payments. For example, if you refinance your current auto loan with a new loan that has a longer repayment period, you will reduce the amount you owe each month.
2. Pay Off Your Car in Less Time
If you’re able to lower your monthly payments, there’s a chance you could pay more toward your loan balance, and pay off the loan in less time. That way, you can avoid paying as much interest over the life of the loan.
3. Reduce Your Interest Rate
Refinancing is an excellent way to reduce your auto loan interest rate. If interest rates have gone down or your credit score has improved since you took out the loan, you might be able to refinance and lock in a lower interest rate.
Additional Benefits of Refinancing
The main benefit of refinancing your car loan is saving money. However, that’s not the only reason to refinance your loan. Here are a few additional benefits of auto loan refinancing:
Remove or Add a Cosigner
If you have a co-signer on your loan, you can use refinancing as an opportunity to remove the cosigner. For example, maybe you needed a co-signer when you took out the loan, but your financial situation has improved and now you don’t need one. When you take out a new loan and refinance, you can easily remove them.
Similarly, you can also add a cosigner when refinancing your auto loan. For instance, maybe you recently got married and want your spouse to co-sign on your loan. You can do this during the refinancing process.
Extend Your Repayment Period
Refinancing allows you to choose a new loan repayment period. If you choose a longer loan term, you will reduce your monthly payments. If you choose a shorter-term loan, your monthly payments might increase, but you’ll be able to pay off the loan sooner. This can help you save money on interest.
Get Access to Quick Cash
A cash-out refinance allows you to borrow against the vehicle’s equity for extra cash. The bank or lender refinances your loan and gives you the difference between the vehicle’s value and the loan in cash. You will receive a lump sum of money that can be used for any purpose. Access to this cash equity can be helpful in emergency situations, but be mindful that you could end up with negative equity in the car.
What Are the Drawbacks of Refinancing?
One of the main drawbacks of refinancing your auto loan is that you might become “upside-down” or “underwater” on your loan. These terms refer to cases where you owe more on the vehicle than what it’s worth. Additionally, lenders might charge you extra when refinancing, such as title transfer, application, or origination fees.
Another drawback could be paying higher interest rates due to your credit score dropping or interest rates increasing. That’s why it’s essential to calculate how much car you can afford to ensure you’re making the best financial decision.
When Does It Make Sense to Refinance?
Need help figuring out if refinancing is right for you? Here are some reasons to refinance an auto loan:
You Can’t Afford Your Current Payments
If you find yourself struggling financially, refinancing your auto loan could give you some breathing room. Refinancing allows you to secure a lower interest rate or a lower monthly payment, which will help you save money.
Interest Rates Have Gone Down
Interest rates are constantly changing and it’s possible that interest rates have fallen since you initially applied for your car loan. Shop around at lenders such as banks and credit unions for auto loans and see how they compare to your existing loan. Even a small change in interest rates, like a drop of two to three points, can help you save money in the long run.
You Want to Access Cash Equity
By selecting a cash-out refinance, you can receive a lump sum of cash based on the equity in your car and the loan’s balance. Some lenders offer this option so borrowers can get cash quickly. While getting cash upfront sounds great, this option is a little risky. You might have to pay more interest or add a few more years to your loan term to cover the equity that you lose.
Your Credit Score Has Improved
If your credit score has improved since getting your original loan, refinancing can be a good option. Lenders usually assign lower interest rates to borrowers with excellent credit. When you secure a lower interest rate, you’ll pay less to borrow the money.
You Want to Get a Better Offer
Many people get their original auto loan from a car dealership. But when you get a loan from the dealership, you’re more likely to pay a high interest rate because the dealer is looking to make a profit. Refinancing your loan is an excellent way to get out of paying a high-interest-rate loan, especially if your credit score has improved or rates have dropped.
Other Options Aside from Refinancing
If you don’t qualify for auto loan refinancing and are having trouble paying for the car, you might have some other options. You can try to renegotiate your existing loan with your lender. Explain your financial situation and see if they will pause payments, lengthen the loan term, or reduce your payments. If this doesn’t work, you could sell the car and use the proceeds to pay off the loan.
As a last resort option, you can also opt for a voluntary repossession. Turn over the car to the lender, and they’ll charge you the remaining balance owed. However, this can have a negative impact on your credit score, so only consider it if you’ve explored your other options first.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.
