The cost to keep your vehicle on the road each month is a challenge for many. As Experian noted, drivers have faced an increase in monthly payments over the past year — an average monthly payment of $417 for used vehicles and $644 for new.
You can refinance your vehicle loan — this is when you apply for a new loan to replace your current one. Refinancing is a great option if your circumstances have shifted, and you are looking to save money on your monthly payments. But this decision does not come without risk, refinancing can raise rates and potentially cause you to become upside down on your loan.
Pros of refinancing your car
The benefits of refinancing your current auto loan come down to saving money. Consider these when determining if refinancing is right for you.
Lower monthly payments
If you are struggling to meet your monthly payments, refinancing can lower your cost and free up some extra cash each month. You can do this by getting a lower rate, a longer term or both. But although signing off on a longer term means you can save money on a monthly basis it also means a higher total cost over the life of the loan.
Pay off your loan sooner
On the other side, refinancing can also lead to paying off your loan early. If you have had a positive income change since you first signed off on your loan, it may be a good time to refinance to a shorter term. By paying off your loan early your total interest paid will also decrease — saving you more money. To get the most out of your refinance, confirm with your current lender that there are no prepayment penalties.
Lower interest rates
Your interest rates make a dramatic difference in the amount of money you have to pay each month. This number is based on a variety of factors but is primarily affected by your credit score. So, if your credit has improved since you took out your loan it may be a great time to explore refinancing options. You will likely receive more favorable terms and rates.
Cons of refinancing your car
Pressing the restart button on your loan by refinancing is not without its risks. Consider these disadvantages.
If you are in a tough financial situation, keep in mind that refinancing your loan does come with some extra fees. These costs can include application, prepayment, title transfer and origination fees. Because the fees can add up, be sure to fully calculate how much the refinance will cost you and how the rate and term compares to your current loan.
Could become upside down
Being upside down on your loan means that the amount your car is worth is lower than the amount that you have left to pay on the loan. It’s also known as being underwater. If you refinance and extend the life of your loan, you are more likely to be in a situation where you owe more than your vehicle’s worth.
High interest rates
Refinancing also comes with the risk of higher interest rates. If your credit has taken a dip, or interest rates have gone up, you may end up with an interest rate that’s higher than your current one. Shop around for different options to do your best to avoid sky-high interest rates.
How to determine if refinancing your car is a good idea
The key to determining if refinancing your loan is a good idea comes down to the amount of money you can potentially save. Weigh the pros and cons while taking advantage of an auto refinance calculator. Some situations where it might make sense for you to refinance include:
- Your credit improved. If your credit score has improved since your initial loan approval you can likely receive more favorable terms and rates through refinancing.
- You sprang for dealer financing. Typically, the terms offered through dealerships are not the best available. Explore other lending options if you currently have dealer financing.
- You can’t make payments. Missing payments can result in fees, damaged credit or worse: repossession of the vehicle. If you cannot make payments, refinancing can allow for a lower monthly payment.
Before refinancing, determine if you will truly save money or if you are just delaying fully paying off your loan. If you are struggling financially there are still alternatives to consider. But if refinancing is the right choice for you, check out Bankrate’s winner for the best auto lender option.