The Pros and Cons of Car Loan Refinancing
Refinancing your car loan can put extra cash in your pocket, but doing so may saddle you with a higher interest rate and a longer loan term.
Written by Jason Tushinski
Reviewed by Jessica Barrett
You may have a valid reason for wanting to refinance your car loan if you’ve vastly improved your credit rating since purchasing your car—beware though, refinancing can lead you to pay higher interest rates and potential fees, plus it could put you in danger of going upside down on your car loan.
While refinancing a
car loan
can have both positive and negative repercussions, they pale in comparison to the consequences you could face if you’re driving around without car insurance
. But with Jerry
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Unlike buying car insurance with Jerry, refinancing a car loan can have some pitfalls. Keep reading to learn the pros and cons of refinancing a car loan!
Pros of refinancing your car loan
So long as circumstances favor it, refinancing your car loan can be a good move if you can arrange to pay lower interest rates, lower your monthly payment, pay off your loan faster, or dip into your car’s equity if you need cash quickly.
You could get a lower interest rate
There are a few reasons why refinancing could be a good idea, especially if you can significantly lower the interest rate you’re paying on your loan.
If you can refinance your loan with an interest rate that is 1% or lower than your current rate, then it may be a good idea.
Another reason you might want to refinance is because your credit rating has vastly improved since buying your car. With better credit, you'll get better loans with lower interest rates than when getting a loan with poor credit (and a higher interest rate).
A third reason you might want to refinance your car is if interest rates have dropped significantly since you bought your car. In this case, you might want to take advantage by paying a lower rate.
Key Takeaway If you’re looking to refinance your car loan, make sure you can reduce the interest rate on your refinanced loan by at least 1% before pursuing the idea any further.
MORE: What is a good credit score for a car loan?
You could lower your monthly payment
If you can lower your actual monthly payment and keep more money in your pocket, then refinancing your car loan may be a good idea.
Why? Your car loan might not be the only loan in your life—you may be balancing a mortgage, student loans, and more on your financial plate.
Refinancing your car loan to pay less each month provides more money in your pocket, so if you’re trying to pay off another loan with a higher interest rate, or trying to lower an onerous debt, a refinanced car loan is one way to put extra cash in your hands.
If you’re set on lowering your monthly payment and want to refinance, talk to your lender and determine if they are willing to help you out with a fair renegotiation. If not, search for a different lender that’s willing to offer you a fairer refinanced loan.
Key Takeaway If you’re hoping to lower your monthly payments with a refinanced car loan, try to get your lender to keep your interest rate comparable to its current level.
You could pay off your loan earlier
To pay off your car loan faster
, you could refinance your loan. You can try to refinance your loan to shorten its term, or the amount of time you’re paying off the loan. You can also try to negotiate a lower interest rate when trying to pay off a refinanced loan more quickly.You can dip into your car’s equity
If you’re in a financial bind—you’re dealing with an emergency, or need money for something more pressing—you can refinance your car loan in order to dip into your vehicle’s equity and get your hands on some much-needed funds.
Your car’s equity is calculated as follows:
- Take your car’s value, and then subtract the amount you owe on your loan from that overall value.
So, let’s say your car is worth $20,000, and you have $10,000 left to pay on your loan, meaning you have $10,000 in equity. You can refinance your loan for, say $15,000, which would leave you with $5,000 in cash, to do whatever you please (or need) with it.
Key Takeaway Dipping into your car’s equity by refinancing your car loan can give you a short-term infusion of cash in an emergency.
Cons of refinancing car loan
While refinancing your car loan can be enticing, there’s no guarantee it will work.
You could end up paying more in interest payments over the life of the new loan term, you might have to pay more in fees, and you could go upside down on your loan, meaning you might owe more on the loan than your car is worth.
You could end up paying more interest
Be wary of refinancing your car loan if your lender wants to extend your loan’s term—even with a lower monthly payment, you could end up paying more in interest rates over the life of your loan than you’re saving.
Reduced monthly payments can be enticing, but are they worth it if you’re paying more interest? Probably not.
You might have to pay fees
You may be stuck with a slew of new fees if you refinance your car loan, or even pay it off early.
Some lenders charge a prepayment fee if you pay your car loan off early—if this is something you want to do, ask your lender about it.
Additionally, if you pay your loan off early, you may have to bite the bullet and cover any fees for re-registering your car or title.
You could end up upside down
While dipping into your car’s equity can be a quick way to get some much-needed cash, this isn’t recommended—except in emergencies.
Why? Because cars depreciate quickly—by as much as 20% in their first year. Dipping into your car’s equity means you’ll owe more on your car than you did before refinancing.
This could leave you in danger of going upside down on your loan, which means you’d owe more money on the loan than the car is worth.
If you do go upside down and want to sell or trade in the car, you’ll owe the difference to your lender—this could be thousands of dollars.
When to refinance
If you’re looking to refinance, you’ll want to make sure of three things. First, that you have a clear goal in mind for refinancing. Second, that you can find good refinancing offers. And third, that you’ve done your homework to make sure refinancing works for you financially.
A clear goal in mind
If you’re refinancing, make sure you’re doing so for a specific reason, such as:
- You’re able to arrange a lower payment (without significantly higher interest rates or loan term extensions)
- You need emergency cash
- A refinanced car loan will enable you to pay off a higher-debt loan faster
You get great refinance offers
You never know what you’ll find unless you look—shop around for any deals you can find on refinancing your car loan.
If you can find a lower interest rate from a reputable lender while being able to maintain the same time limit as the original loan, you might have found yourself a good deal.
Otherwise, be wary of any refinancing offers that will saddle you with higher interest rates or a longer loan timeline.
MORE: 8 easy tips for saving money on car insurance
Crunch the numbers
Before you decide to refinance your car loan, do the math and think carefully about whether such a move makes sense.
Ask yourself if at the end of a term for a refinanced loan, you’ll be ahead financially or not. If you do the math and realize that refinancing will see you pay more money in interest by the loan’s end, you might want to re-think refinancing.
If you can refinance your loan and secure an interest rate 1% or more lower than your current rate, that could be a good deal, so long as the term length of the loan isn’t significantly extended.
Taking care with Jerry
Whether you’ve got questions about refinancing your car loan or not, there’s no need to question how to get a great
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policy at an affordable price. That’s what Jerry
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