car payment

The Pros and Cons of Refinancing an Auto Loan

Holly Johnson — Sun, 01 Nov 2020 17:32:44 +0000

Over the last decade, the rising cost of new and used cars have driven up the amount of the average car loan. To make up for this, auto lenders have started offering longer car loans that let consumers borrow more with a lower monthly payment.

The State of the Automotive Finance Market from Experian states the average new car payment worked out to $554 during Q1 of 2019 while the average used car came with a monthly payment of $391. Worse, the average new car loan worked out to $32,187 while the average used car loan was $20,137. Meanwhile, the average loan term was more than 68 months for new cars and almost 65 months for used.

It's never fun owing money on your car, but borrowing too much (or borrowing money for too long) can leave you wishing you had a different auto loan. This is especially true if your loan has a high interest rate because you had shaky credit when you applied.

If you're on the fence about refinancing your auto loan, it helps to know how this move could help you or hurt you. Here's everything you need to know.

Pro: You could secure a lower monthly payment

Depending on the details of your initial loan, it's possible refinancing your car loan could secure a lower monthly payment you can more easily afford. This can be important if you're struggling to keep up with your payment as it stands, or if you just need more wiggle room in your monthly budget.

With a lower monthly payment, it might be easier to stay on top of your living expenses and other bills. And if you plan to keep your car for the long haul, you may not mind extending your repayment timeline in order to lower your payment each month. (See also: Cutting Your Car Payment Is Easier Than You Think)

Con: You may extend your repayment timeline

Getting a lower monthly payment can be a boon for your finances, but don't forget you'll likely be stuck paying on your car loan for months or years longer than you would have otherwise. And this can create unintended financial consequences later down the road.

This is especially true if you're extending the loan on a used car that's already several years old. You could be stuck making payments on an older vehicle that breaks down and requires pricey repairs. This could be a double whammy for your finances later — even though refinancing saves you money on the front end.

Pro: You could get a much lower interest rate

Another potential advantage of refinancing is the fact you might be able to qualify for a lower interest rate. If that's the case, refinancing your auto loan could save you hundreds — or even thousands — over the life of your loan.

Imagine your current auto loan balance is at $15,000 and you have a 19 percent APR and 48 months left on your loan. From this point forward, you would pay an additional $6,528 in interest before your loan is paid off in four years.

If your credit score has improved, however, you might qualify for a new auto loan with a better rate. By refinancing into a new 48-month car loan at 9 percent APR, for example, you could reduce your future interest costs by more than half to just $2,917 while lowering your monthly payment in the process.

Con: You might pay more interest over the life of your loan

Before you take steps to refinance your auto loan, make sure you run the numbers with an auto loan calculator so you can compare your total interest costs. Securing a lower interest rate or lower monthly payment may be a better deal in the short term, but you may wind up paying more interest on your loan due to a lengthier timeline.

Pro: Tap into any equity you have

Refinancing your auto loan can also help you tap into any equity you have in your car. This can be a lifesaver if you need money for emergencies or simply want to consolidate debt at a lower interest rate.

Just remember that, as highlighted above, refinancing could mean more interest paid over time — even if you get a lower rate.

Cons: Refinancing isn't free

Finally, don't forget that refinancing your car loan typically comes with fees. These fees will vary depending on the auto lender you work with, but they can include an application fee, an origination fee, and an auto lien transfer fee.

Also, make sure to check that your initial car loan doesn't charge any prepayment penalties that will come into play if you refinance your loan.

Should you refinance your car loan?

Only you can decide if refinancing your car loan makes sense. It's possible switching to a new loan could save you money on interest and/or leave you with a lower monthly payment, but it's also possible a new loan will leave you paying more interest and more fees over time.

Make sure you run the numbers before you move forward, but only after comparing auto refinancing offers from at least three different lenders. By comparing multiple lenders, you'll improve your chances of ending up with a new auto loan that will leave you better off.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Prioritize These 5 Bills When You're Short on Cash

Dan Rafter — Tue, 20 Oct 2015 13:15:23 +0000

You know you should pay all of your bills on time. But what if you're short on cash this month? Is it better to pay certain bills late?

Yes, actually. Some bills are not reported to the three national credit bureaus of TransUnion, Experian, and Equifax. Bills in this category include utility bills, cell phone payments, medical payments, and cable bills. This doesn't mean that you should pay these bills late. But if you have to do some emergency financial juggling this month? Pay your cable late, not your mortgage or credit card payment.

Here are five bills you should always pay on time, each month. Not doing so could damage your credit, leave you with huge financial penalties, or even cause you to lose your home or car.

1. Your Mortgage

Dave Hardin, president of Hardin Financial Group in Troy, Michigan, says that no late or missing check will hurt your credit score more than a missed mortgage. A single late mortgage payment can cause your credit score to fall by 100 points.

"If you pay that late, that will have the single greatest effect on your credit score," Hardin said. "Your mortgage is the big one."

If you miss too many payments, your mortgage lender will foreclose on your home, evicting you and taking ownership of your property.

But don't panic if you're two days late on paying your mortgage. As Hardin says, your mortgage lender won't report your payment as officially late until it is at least 30 days past the deadline. This gives you some leeway if you are struggling to scrape together enough cash to pay your mortgage this month.

"That doesn't mean you should wait that long to pay your mortgage," Hardin said. "But late officially means 30 days late, not two days."

Paying your mortgage bill late can also set you up for future financial pain. Kyle Winkfield, managing partner of O'Dell, Winkfield, Roseman and Shipp in Rockville, Maryland, says it's easy for your finances to spiral out of control when you miss a mortgage payment.

"Say you miss your $2,000 mortgage payment one month. Now you have to come up with $4,000 the next month to catch up," Winkfield said. "That's not easy."

2. Student and Auto Loans

You should never miss your student or auto loan payments either, Hardin said. That's because these are fixed payments that you know are coming up each month. Missing fixed payments is a big deal because lenders are more likely to believe that you didn't send in your payment not because you forgot about it, but because you couldn't pay it.

Your car payment is an especially important bill, because your loan is secured by your actual car. This means that lenders have something to go after should you stop making your payments.

"Be vigilant about making your car payments," said Scott Sadar, executive vice president of Somerset Wealth Strategies in Portland, Oregon. "If you are not, your car could be repossessed."

Again, these payments aren't officially late until 30 days have passed.

3. Credit Card Payments

Missing your credit card payment could leave you with a double whammy of pain. First, credit card companies will report your missed payments to the credit bureaus if you are 30 days late or more, causing your credit score to fall.

Secondly, if you pay late by 60 days or more (in some cases less), your credit card company can assess a penalty interest rate on your card. This can be financially devastating if you carry a balance on your credit cards each month. Sadar says that these rates can hit 22% or higher, which can cause existing balances to grow quickly, even if you don't make any new payments with your card.

4. Your Rent

It wasn't until last year that Experian and TransUnion began collecting data for on-time rent payments. The third major national credit bureau, Equifax, still doesn't do this. But even if the credit bureaus weren't tracking your rent payments, you'd still want to make this payment on time every month. Simply put, you don't want to lose your home, and missing too many rent payments could lead to that.

It's not easy for landlords to evict tenants, and it will take more than one or two late payments. But if you fall too far behind, your landlord will start the eviction process, possibly leaving you without a place to live.

"You always want to protect the roof over your head," Winkfield said. "That holds true whether you own a home or you are renting. Always make the payments that keep that roof over your head."

Of course, you don't ever want to be in the position where you can't pay all of your monthly bills. Yes, paying your cable bill late one month isn't going to destroy your finances. But if you're juggling payments every month, that's a sign that there is a problem. It's also a sign that you need to take a closer look at your budget to determine if you there are expenses you can eliminate.

"Sometimes we get too wrapped up in our wants instead of our needs," Winkfield said. "If things are tight — and we've all been there — then you might need to eliminate some of the wants from your budget."

And if you are struggling to pay certain bills? Don't hide. Hardin says that the best move you can make is to call the creditors behind the bills and explain to them that you are struggling. Many will work with you to find at least a temporary solution. If you call, creditors are less likely to report you as late to the credit bureaus.

"If you don't call, the lenders have no choice but to think that you aren't paying just because you don't want to pay," Hardin said. "You should not be embarrassed to call your creditors. You'd be surprised at how easy creditors make these conversations. They don't want to lose you as a customer, so they usually are willing to work with you."

Have you ever fallen behind on your bills? How'd you cope?

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: