Refinancing an auto loan can be helpful or it can end up really costing you. For most people, preparing a list of the pros and cons can make it easier to decide if this is a move you want to make.
First, let’s look at the pros.
- If your credit has improved or the market has, you may qualify for a lower interest rate. A lower rate could decrease the amount you’ll pay over time. It could also enable you to pay off the loan faster if you’re able to apply more to the principal.
- Refinancing can help you lower your monthly payment. If you only have 12 months left on your loan but refinance it for 24 months, your monthly payment will likely be lower. This can add some wiggle room to your monthly budget.
- You may qualify for a cash out refinance. If you find you’re in need of a sum of money and you have enough equity in your car to borrow against it, you may wish to refinance your loan. For example, if you still owe $3,000 on the car and it’s worth $5,000, you could refinance it for $4,000 and take $1,000 in cash.
When you only look at the benefits of refinancing, it can seem like a great deal. But some deals are too good to be true and people rarely get something for nothing. Here are some things to consider before you refinance.
- Even if your interest rate is lower, you may still end up paying more for the loan by the time you’re done. This is because a refinance often involves extending the loan, which leads to a longer period of time where you’ll be making interest payments. It’s important to do the math before you decide.
- Extending your loan increases your commitment. If you’re not getting a better interest rate and you don’t need a lower monthly payment, refinancing can just result in extending your loan term. This means you’ll be tied to that car payment that much longer.
- You can be charged a fee. Depending on how much it costs to apply for the refinance, it may negate the savings.
- Cashing out could put you deeper in the hole. By borrowing against the value of your car and taking cash at refinancing, you’re raising the amount of debt you’ll have. Make sure this is truly what you want to do before you sign.
It’s important to give a lot of thought to a refinance and carefully look at why you want to do it. You may find it’s the best way to improve your financial situation, but sometimes you may want to just leave well enough alone.
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