What are the pros and cons of refinancing my car loan?

Answered by Car Loans Expert Jim on April 7, 2021

I'm on the fence about refinancing my car loan. What pros and cons should I weigh before making my decision?

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Jim

Car Loans Expert

“The pros of refinancing your auto loan are dependent on the circumstances at the time you are applying. If your credit score is better than when you applied for the original loan, or if interest rates have decreased, you can likely get a lower interest rate by refinancing. You can also reduce your monthly payment, which will help free up money for other expenses and potentially stave off a default if you are having financial problems.

The cons of refinancing are few but significant. Sometimes there are penalties or fees for refinancing. Whether these are prepayment penalties or processing and administration expenses, they can reduce or even exceed the savings you would get from refinancing. Prepayment penalties are rare, but they are usually charged on loans to low-credit-score borrowers as a means of keeping them locked into a high interest rate.

Depending on how long you’ve been paying on your original loan, you may owe more on the car than it’s worth. In this case, your new loan amount may not fully pay off your old loan, leaving a balance that you will owe in a lump sum. The newer the loan, the more likely this is, and it will definitely overrun most, if not all, of your anticipated savings from refinancing. “


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