The cost of keeping your vehicle on the road each month is a challenge for many. Monthly payments on cars have soared — an average monthly payment of $526 for used vehicles and $716 if you buy new, according to Experian.

Many consumers consider refinancing — or replacing their current loan with a new one — to make these costs more manageable. Refinancing may reduce your monthly payments if your circumstances have shifted or market conditions have improved since you took out your current loan.

But refinancing is not without risk and can be more costly in some instances. So, it’s best to consider the benefits and drawbacks of refinancing and assess your financial situation to determine if it’s a smart move.

Pros of refinancing your car

The benefits of refinancing your current auto loan center around saving money. You may also be able to refinance for more than you owe if you need cash. Consider these when determining if refinancing is right for you.

Lower interest rates

Your interest rate significantly impacts your monthly auto loan payment. This number is based on your credit score, among other factors. If your credit has improved since you took out your loan, which could be the case if you’ve made timely loan payments and responsibly managed your other debts, it may be a great time to explore refinancing options. You will likely receive more favorable terms and rates.

Lower monthly payments

If you struggle to meet your monthly payments, refinancing can make your monthly payment more affordable and free up cash in your budget. You can get a lower rate, a longer term or both. But although signing off on a longer term means you can save money every month, it also means a higher total cost as you’ll pay more in interest over the life of the loan.

Pay off your loan sooner

Refinancing can also lead to paying off your loan early. If your income has increased since taking out your auto loan, it may be a good time to refinance to a shorter term. If you pay your loan early, you’ll save on interest — assuming the lender’s prepayment penalty doesn’t outweigh your savings.

But if you’d prefer not to refinance, you can make larger monthly payments to reduce the balance faster. You’ll accomplish the same objective and may save money by avoiding the origination fees that may accompany refinancing.

Access quick cash

Some lenders offer cash-back auto loan refinancing, which can be beneficial if you need fast cash. It works the same as traditional refinancing, but in addition to a new loan that replaces your current one, you’ll also receive a lump sum of cash based on the equity you have in your vehicle. While you may also secure better loan terms or a lower monthly payment, this type of refinancing is not without risk.

By pulling out the equity you’ve built up in cash, there’s a chance you’ll become upside-down in your loan, owing more than it’s worth. This makes it more challenging to turn a profit if you decide to sell. Plus, you’ll take on extra debt, as your outstanding auto loan balance will be higher.

Cons of refinancing your car

Pressing the restart button on your auto loan by refinancing is not without its risks. Consider these disadvantages.

High interest rates

Refinancing also comes with the risk of higher interest rates. If your credit has dipped or interest rates have gone up, you may find interest rates higher than your current one.

In the current market, steep interest rates aren’t uncommon. Recent Fed rate hikes have driven interest rates up to record highs. So, it’s in your best interest to shop around for different options to do your best to avoid sky-high interest rates or wait it out until market conditions improve.

Additional fees

If you are in a tough financial situation, remember that refinancing your loan comes with extra fees. These costs can include application, prepayment, title transfer and origination fees. Because the fees can add up, calculate how much the refinance will cost you and how the rate and term compare to your current loan.

Could become upside down

If you refinance and extend your loan’s term, you are more likely to end up owing more than your vehicle’s worth. This is commonly referred to as being upside-down or underwater on your loan.

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. Below are some situations where it might make sense to refinance:

  • Your credit improved. If your credit score has improved, you may receive more favorable terms and rates through refinancing.
  • You received 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 may get you a lower monthly payment.
  • You qualify for a better interest rate. If market rates are better than when you initially applied, you may qualify for a lower interest rate. However, this likely isn’t the case since market rates aren’t currently trending downward due to recent Fed rate hikes.

If you decide to refinance your auto loan, start by shopping around with multiple lenders to find the best available rate. Many offer pre-qualification tools on their websites that allow you to view potential loan offers, including estimated loan terms, interest rates and monthly payments, without impacting your credit score. Consider getting pre-approved with at least three lenders so you can formally apply with confidence.

Next steps

Before looking for refinance rates, weigh the advantages and disadvantages and how they apply to you to make an informed decision. Ideally, you want to save money instead of simply stretching out your loan term.

If you are struggling financially, it may be sensible to look beyond refinancing to get a more affordable monthly auto loan payment. Ask the lender to modify your current loan or consider trading your car in or selling it privately to get the relief you need.

But if refinancing is the right choice for you, check out Bankrate’s pick for the best auto lender.