The cost of keeping your vehicle on the road each month is a challenge for many. Monthly car payments have skyrocketed — according to Experian, the average monthly payment is $503 for used cars and $648 for new cars.
Many consumers are considering refinancing — or replacing their current loan with a new one — to make these costs more manageable. If your circumstances have changed or market conditions have improved since you took out your current loan, refinancing can reduce your monthly payments.
However, refinancing is not without risk and in some cases can be more expensive. So it’s best to consider the pros and cons of refinancing and assess your financial situation to determine if it’s a smart move.
Benefits of refinancing your car
That Benefits of Refinancing Your current car loan is all about saving money. Keep these in mind when determining if refinancing is right for you.
Lower interest rates
Your interest rate has a significant impact on your monthly car loan payment. This number is based on a variety of factors, but is primarily influenced by your credit score. If your credit rating has improved since you took out your loan, it may be a good time to explore refinancing options. You will probably get better terms and prices.
Lower monthly payments
If you’re struggling to make your monthly payments, refinancing can lower your costs and free up extra money each month. You can do this by getting a lower interest rate, a longer term, or both. But while a longer term can save you money each month, it also means a higher overall cost because you pay more interest over the life of the loan.
Pay off your loan sooner
Debt restructuring can also lead to early repayment of your loan. If your income has increased since you took out your car loan, it may be a good time to downgrade to a shorter term. Prepaying your loan reduces the interest you have to pay – provided the lender does not charge any prepayment penalties.
Disadvantages of refinancing your car
Hitting the restart button on your car loan through refinancing is not without its risks. Consider these downsides.
High interest rates
Refinancing also carries the risk of higher interest rates. If your credit rating has gone down or interest rates have gone up, you may end up getting an interest rate that is higher than your current one.
High interest rates are not uncommon in the current market given the recent Fed rate hikes that have pushed interest rates to record highs. So it’s in your best interest to look at different options to do your best to avoid sky-high interest rates or wait for market conditions to improve.
If you are in a difficult financial situation, remember that refinancing your loan comes with some additional fees. These costs may include application, prepayment, title transfer and incorporation fees. Because the fees can add up, make sure you fully calculate how much the refinance will cost you and how the interest rate and term compare to your current loan.
Might be turned upside down
If you refinance and extend the term of your loan, you are more likely to find yourself in a situation where you owe more than the value of your vehicle. This is commonly referred to as upside down or under water on your loan.
How to determine if refinancing your car is a good idea
The key to determining whether refinancing your loan is a good idea depends on the amount of money you can potentially save. Weigh the pros and cons while using an automated refinancing calculator. Below are some situations where refinancing might make sense:
- Your credit rating has improved. If your credit rating has improved, you can obtain more favorable terms and rates by refinancing.
- You received dealer financing. Typically, the terms offered by traders are not the best available. Explore other credit options if you currently have dealer financing.
- You cannot make payments. Missing payments can result in fines, damaged credit, or worse, repossession of the vehicle. If you can’t make payments, refinancing may give you a lower monthly payment.
Before refinancing, weigh the pros and cons and how they apply to you to make an informed decision. Ideally, you want to save money rather than simply extend your loan term.
If you’re struggling financially, it may make sense to look beyond refinancing to get a more affordable monthly car loan payment. Ask the lender to modify your current loan, or consider trading your car or selling it privately to get the relief you need.
But if refinancing is the right choice for you, check out Bankrate’s winner for the best car lender.