The Pros and Cons of Refinancing an Auto Loan

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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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