Refinancing your car loan can seem appealing, but there are some definite cons. You want to make an educated decision, so it’s important to weigh both pros and cons of this financial decision. These are some of the most important things you should think about before refinancing.
Pros of Refinancing Your Auto Loan
- Lower Interest Rate: By refinancing, you can get a lower interest rate than the one you currently have. You don’t have to accept a refinance loan to see the new interest rate, but keep in mind that each inquiry into your credit will impact your credit negatively.
- Extra Money: If you’ve studiously made payments on your loan, you may owe less than your car is worth. Refinancing your loan gives you the value of your vehicle, meaning you can pay off your loan and then spend the rest of the money on what you want—home improvements or whatever.
- Lower Payments: In most circumstances, your first car loan covered the entire price of your vehicle. When you refinance, your loan will be much lower than the original loan, which may significantly lower the amount you pay per month.
- Change Lenders: If you aren’t happy with your current lender, refinancing your loan gives you the chance to get a new lender and new terms that are more agreeable. Be sure to research the new company before accepting a loan so you don’t end up in a worse situation.
Cons of Refinancing Your Auto Loan
- More Interest: Sometimes refinancing a loan doesn’t help you long-term. If the terms are longer than your previous loan, you may end up paying more interest over the years. To determine how much extra you’ll spend on interest, you can use an interest calculator.
- Higher Interest Rate: Just because you’re refinancing your loan doesn’t mean you’ll get more favorable rates. If you’ve had a significant impact on your credit, you may get a worse rate than you have now. Even if the rates of the new loan are lower, you may end up paying much more in interest than you consider reasonable.
- Reduced Collateral: Your car is collateral when you refinance your loan, but because cars depreciate so quickly, you may be surprised when you discover the fair market value of your vehicle. If you cannot pay the loan, your car may be repossessed. Unfortunately, the value may not equate the balance that is remaining on your loan, meaning you’ll be responsible for the remaining balance.