Pros and cons of refinancing a car: is it the right choice for you? Part Of Refinancing a Car Loan In this series Refinancing a Car Loan Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make smarter financial decisions by providing you with interactive tools and financial calculators as well as publishing objective and original content. This allows you to conduct your own research and compare information at no cost – so that you can make sound financial decisions. Bankrate has partnerships with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The products that appear on this site are from companies that compensate us. This compensation could affect how and where products appear on this site, including the order in which they may appear in the listing categories, except where prohibited by law. Our mortgage or home equity products, as well as other home lending products. But this compensation does affect the information we publish, or the reviews you read on this site. We do not contain the entire universe of businesses or financial deals that might be open to you. Westend61/Getty Images
4 minutes read Read Published March 02, 2023.
Writer: Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is an expert in understanding the ins and outs of securely borrowing money to purchase an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain the confidence to control their finances through providing precise, well-studied and well-researched data that simplifies complex topics into manageable bites. The Bankrate promise
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We are compensated in exchange for the promotion of sponsored goods and, services, or when you click on certain hyperlinks on our site. This compensation could impact how, where and in what order the products are listed within categories, with the exception of those it is prohibited by law for our mortgage, home equity and other home loan products. Other elements, like our own rules for our website and whether the product is offered in your region or within your personal credit score may also influence the way and place products are listed on this site. While we strive to provide a wide range offers, Bankrate does not include information about each credit or financial products or services. Costs of maintaining your vehicle on the road every month is a challenge for many. The monthly payments for cars have increased dramatically to an average monthly payment of $526 for used vehicles and $716 for those who purchase new . Many consumers consider — or replacing their current loan with a new one in order to make the expenses more manageable. Refinancing can reduce your monthly payments if your circumstances have shifted or the market has changed since you obtained your current loan. However, refinancing comes with the risk of being expensive in certain instances. Therefore, you should think about the advantages and disadvantages of refinancing and analyze the financial circumstances of your situation in order to decide if it’s a wise decision. Benefits of refinancing your vehicle The your current auto loan focus on saving you money. You may also be able refinance to pay more than what you owe, if you require cash. Consider these when determining whether refinancing is suitable for you. Lower interest rates. Your interest rate greatly affects the monthly car loan payment. This number is based on your score on credit, as well as other elements. If your since you took out your loan and you’re not sure, this could be the case if you’ve been making timely loan payments and effectively dealt with other debts, it may be a great time to consider refinancing your options. You will likely receive higher rates and terms that are more appealing. Pay less monthly if you struggle to meet the monthly bills, refinancing can make your monthly payment less expensive and help you let you free up money in your budget. You can get a lower rate, a longer term or both. But although the signing off of a loan means you can save money every month, it will also mean a higher total cost as you’ll be paying more interest over the life that of the loan. Make sure you pay off your loan sooner Refinancing can result in having to pay off your loan earlier. If your income has grown following the purchase of your auto loan then it could be an ideal time to consider refinancing to a shorter term. If you pay your loan early you’ll save money on interest — assuming the lender’s fees don’t exceed your savings. If you don’t want to refinance, then you can pay larger monthly installments in order to reduce your balance quicker. This will accomplish the same goal and save money by avoiding charges for origination that can be associated with refinancing. Cash in quick time Some lenders provide it , which can be beneficial when you require quick cash. It’s similar to conventional refinancing. However, instead of a new loan that is a replacement for your current one, you’ll receive an unrestricted cash payment dependent on the equity in your vehicle. While you may also secure better loan conditions or a lower monthly installment, this type of refinancing comes with the risk. If you take equity you’ve accrued in cash, you run the risk that you’ll end up upside-down on your loan, owing more than what it’s worth. This makes it more challenging to make a profit should the time comes to dispose of. In addition, you’ll be taking on extra debt, as your current auto loan amount will be greater. The disadvantages of refinancing your vehicle The process of refinancing not without risk. Be aware of the disadvantages. A high interest rate when refinancing comes with the risk of more expensive interest rates. If your credit score has declined or interest rates have gone up, you may discover interest rates that are higher than your current one. In today’s market the high rates of interest are not uncommon. Recent developments have increased interest rates to record levels. It’s therefore in your best interest to look around for various alternatives to try to stay clear of astronomically high interest rates, or just wait until conditions improve. Additional charges If you’re facing financial difficulties Be aware that refinancing your loan will incur additional costs. These costs can include application for prepayment, title transfer, prepayment and origination charges. Since these fees could add up, consider the amount that refinancing will cost you and what the term and rate compare to your current loan. It could be upside down if you refinance and prolong your loan’s term in any way, you’re more likely to end up having to pay more than the vehicle’s worth. It is usually referred to as being on your loan. Find out whether refinancing your car a good idea The key to determining if it’s a good idea comes down to the amount you can potentially save. Consider the pros and cons of taking advantage of an . Below are some situations where it might make sense to refinance: Your credit improved. If your credit score has improved, you might be offered better terms and rates through refinancing. You received dealer financing. Typically, the terms provided through dealers are not the best available. Explore other lending options if you have . You can’t make payments . In the event of a missed payment, it could result in penalties, credit damage or even repossession of the vehicle. If you’re unable to pay your bills and refinancing might result in lower monthly payments. You are eligible for a higher interest rate. If rates are higher than when you initially applied, you could be eligible for an interest rate that is lower. But, that’s not likely to be the case because market rates aren’t currently decreasing because of recent Fed rate increases. If you’re considering refinancing your auto loan begin by looking around with multiple lenders to find the best available rate. There are many lenders that offer pre-qualification tools on their websites that permit you to view potential loan offers, which include estimated loan conditions as well as interest rates and monthly payments, all without impacting the credit rating. Consider getting pre-approved with more than three banks before you can make a formal application with confidence. Prior to deciding on the pros and disadvantages, and consider how they can help you make an informed decision. Ideally, you want to save money rather than simply prolonging the loan duration. If you are struggling financially you might want to opt for an affordable monthly auto loan payment. Request the lender to consider trading your car or selling it privately to obtain the financial relief you require. If refinancing is the right choice for you, then look for the best auto lender.
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This article is written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the ways and pitfalls of taking out loans to buy a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to control their finances through providing precise, well-studied information that breaks down complicated topics into digestible chunks.
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