The Pros & Cons of Refinancing Your Auto Loan
If you have an auto loan with a high interest rate, refinancing the loan may sound like a good idea. But there are pros and cons to refinancing and it’s important to look at many factors before taking this step.
What are the pros?
You can trim monthly payments and reduce the overall cost of the vehicle — Say you had to finance a car at a point when your credit score was not as good as you’d have liked. If your score has improved by even 50 points, you may now qualify for a better interest rate. In this case, refinancing the car may be a good plan.
It can also make sense if rates are lower now than when you borrowed for your car and you’re not too far into the loan term. Say you’ve been paying on a $35,000 car loan for two years, originally set up as a 6-year loan at 8.5% with a $622 monthly payment. If you can refinance the last 4 years of that loan at even 5.5%, your new monthly payment will be $587, and you’ll pay $1,680 less for the loan overall.
You can use the equity in your car to cash-out — If you need cash for a financial emergency, you can borrow with a cash-out refinance loan. This involves using the equity you have in the car (the value of the car minus the amount you still owe on it). For example, if your car is worth $30,000 and you’ve got a remaining balance of $15,000 on your loan, you can borrow $20,000 and take $5,000 of it in cash.
What are the cons?
A longer term may mean paying more in interest —Although a loan with a longer term may have a smaller monthly payment, the extra year or two of interest means you will likely pay more for the car overall than with your previous loan. Generally, the longer the term, the more interest you will pay.
Your current lender charges prepayment fees — Ask your current lender if there is a prepayment penalty for paying off the loan ahead of schedule.
You may end up owing more than your car is worth — If you decide to sell or trade your car before the loan is paid off, and your car’s value is less than the remaining balance on your loan, you’ll have to pay the lender the difference. Say your car is worth $9,000, but you have $11,000 remaining on the loan. When you sell it, you’ll have to pay the lender $2,000 more than the car’s value.
It’s also important to know that there are many factors that will affect your refinance: age and condition of the car, your credit score, other debt obligations, and employment stability. So, before you refinance your auto loan, talk to a loan professional at Dort Financial to assess your refinancing opportunities and help you make the best decision for your situation.
