Loan Modification vs. Refinance: Which Is the Better Option?

Whatever’s putting the pinch on your wallet, Jerry can help you decide whether an auto loan modification or refinancing is right for you.
Written by Sarah Gray
Reviewed by Jessica Barrett
If you’re having trouble making your monthly car payment, or your financial situation has changed since you purchased your vehicle, you may be considering a refinance or a loan modification—but which option makes the most sense for you?
Next to rent or mortgage payments, car payments are often our largest monthly expenses. If you need to think about saving cash, you might be trying to find answers for how you can lower your car payment—but not all lenders offer loan modifications, and not all borrowers can afford a refinance. 
If you’re wondering whether a loan modification or a refinance could help you with your cash flow,
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Loan modification vs. refinance: which is better?

To modify or refi—that is the question. Unfortunately, there’s no one right answer for everyone. Which is better for you—a loan modification or a refinance—will depend on a number of factors. 
To find out whether you should modify or refinance your loan, let’s take a closer look at each option.

What is a loan modification?

Put simply, a loan modification is a revision of the original terms of your loan. Rather than paying off your current loan with a new one, a loan modification changes the conditions of your current loan, which can result in a lower monthly payment. 
Many lenders offer loan modification programs for borrowers experiencing financial hardship. In fact, many more have begun offering such programs since the start of the pandemic than ever before. When negotiating a loan modification with your, you and your loan servicer can discuss adjustments to:
  • Loan terms—Extending your loan term can help you achieve a lower monthly payment.
  • Interest rates—You may be able to negotiate
    a better interest rate
    to help lower your monthly payment.
  • Due date—If you’re among the many who are paid monthly rather than biweekly, a simple due date shift may be a major benefit for you.
  • Payment deferral or forbearance—If you’re experiencing a financial hardship, your lender may be willing to work with you to defer a set number of payments in the short term.
Now that we’ve considered what a loan modification actually is, let’s take a look at some of the upsides and downsides.

Pros of loan modification

A major upside to loan modification is that it can help you avoid negative marks on your credit report. If you’ve missed payment on your car loan, working directly with your current lender to modify your loan could help you prevent damage to your credit score, and could forestall or prevent repossession. It also demonstrates a good-faith effort toward repayment of your debt.

Cons of loan modification

One of the biggest downsides of loan modification is that it isn’t readily available to all borrowers. Plus, the process to modify your loan can be lengthy and tedious. You’ll typically be required to submit a hardship letter, explaining your circumstances and how a loan modification will help.
In addition to the hassle of the modification process, a loan modification also usually results in increased costs over time. Certainly, you could get a lower, or deferred, monthly payment now, but the full loan amount will still need to be paid at some point. The longer it takes you to do this, the more money you’ll be spending in
interest over the life of the loan
, even if you’re able to negotiate a lower interest rate.

When does a loan modification make sense?

While it isn’t always the best option, a loan modification may make sense for you if your financial situation has suddenly changed due a layoff, job loss, medical emergency, or other circumstance that has significantly sapped the funds you’d normally have available for making your payments. 
Loan modification may also be a good option to help you
get out of an upside down car loan
. This means you owe significantly more than your car is worth.
Key Takeaway Loan modification may be a smart financial move if you’re experiencing financial hardships that make your monthly car payment unaffordable.
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What is loan refinancing?

Another option borrowers have for lowering the monthly payment on their vehicle loan is refinancing. While a loan modification revises the existing terms of the loan, when you refinance an auto loan, you actually swap out your existing loan for a new loan with new terms and conditions. This means you have to go through the entire lending approval process again, but it may be a good option for you when loan modification isn’t.
Once you’re approved for a loan refinance, your new lender will pay off the principal balance of your original loan, and you will begin making payments to your new lender on your new loan.

Pros of refinancing

Unlike loan modification, refinance programs are open to all borrowers, not just those experiencing financial hardship. Refinancing allows you the opportunity to work with different lenders to get better rates and loan terms. 
Similar to loan modification, refinancing will result in new loan terms that can significantly lower your monthly payments.
Refinancing isn’t just for borrowers who are having trouble making their payments—it can also be a great option for those simply looking to take advantage of a better deal. For this reason, while loan modification almost always results in higher costs to finance a vehicle, refinancing can result in lowering the costs of your loan by saving money on interest over time. 

Cons of refinancing

Refinancing can be just as tedious and time consuming as loan modification, though for different reasons. Rather than producing hardship letters, you will be negotiating the entire loan application process again. This means you need good or—better yet—excellent credit to qualify for better terms than you already have. This isn’t the easiest thing to accomplish if you’re experiencing financial hardship.
Refinancing could hurt your credit score—at least in the short term—and it could also result in fees and penalties from your current lender. Because refinancing repeats the entire lending process, it does involve a hard inquiry on your credit report, which usually lowers your score. Plus, some lenders assess a
prepayment penalty
for early loan payoff since it “cheats” them out of the full amount of interest they would otherwise collect if you stick to your regular payment terms. 
Refinancing isn’t available on all vehicles. Most lenders require that the car being refinanced is not more than 10 years old and that mileage not exceed 100,000 miles.

When should you refinance a car loan?

If you’re looking for ways to lower your monthly car payment, refinancing may be a good personal finance option. Refinancing can also be a smart option for those looking to lower the overall costs of their auto loan by lowering their interest rate.
Key Takeaway Refinancing can be a great option for both lowering monthly payments and decreasing the overall cost of your auto loan.
MORE: Does refinancing a car hurt your credit score?

How to easily refinance your car loan

Once you’ve determined which option is best for you, your next step is to actually contact your current lender to inquire about loan modifications or begin shopping for the best deal on a full refinance. 
You may already know that
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can save you tons of money on your
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By lowering your APR or reducing your monthly payment, you can join Jerry users who lower their monthly payments by an average of $118 per month!
But why stop there? Shopping for car insurance with Jerry could add over $800 a year to your savings by lowering your insurance premiums!
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FAQs

That depends on how you define “easy.” Loan modification doesn’t require all the application and approval steps involved in a refinance, but it does require you to stretch your argumentative skills to convince your lender to work with you.
It really depends on your situation. If you’re experiencing serious financial hardship, a loan modification may be a smart financial move. However, if you’re simply looking for a better deal on your interest rate or monthly payments, a refinance may be the better course.
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