Your money is working harder
Over the past decade, the rise in the cost of new and used cars has led to an increase in the size of the average car loan. To offset this, auto lenders have begun offering longer-term auto loans that allow consumers to borrow more with a lower monthly payment.
Experian’s Automotive Financial Market Report states that the average payment for a new car was $554 in the first quarter of 2019, while the average monthly payment for a used car was $391. Even worse, the average loan for a new car was $32,187, while the average loan for a used car was $20,137. At the same time, the average loan term was more than 68 months for new cars and almost 65 months for used cars.
Borrowing money for a car is never fun, but if you’re borrowing too much (or borrowing too long), you may wish you had another car loan. This is especially true if your loan has a high interest rate because you had a shaky credit history when you applied.
If you’re on the cusp of refinancing your car loan, it’s good to know how this step can help you. or hurt you. Here’s everything you need to know.
Pro: You can secure a lower monthly payment
Depending on the details of your original loan, it’s possible that auto loan refinancing can provide a lower monthly payment that you can more easily afford. This can be important if you’re struggling to keep up with your payment in its current form, or if you just need more wiggle room in your monthly budget.
With a lower monthly payment, it may be easier to stay on top of your living expenses and other bills. And if you’re planning on keeping your car for the long term, you might not mind extending your repayment term so you pay less each month. (See also: Cutting Your Car Payment Is Easier Than You Think)
Con: You can extend the repayment period
Getting a lower monthly payment can be a boon to your finances, but don’t forget that you’ll likely be stuck paying off your car loan for months or years longer than you would otherwise. And this can lead to unforeseen financial consequences in the future.
This is especially true if you are renewing a loan for a used car that is several years old. You may be stuck paying for an old car that breaks down and requires costly repairs. This can be a double whammy to your finances later on, even though refinancing will save you money initially.
Pros: You can get a much lower interest rate
Another potential benefit of refinancing is the fact that you can qualify for a lower interest rate. If so, refinancing your auto loan could save you hundreds or even thousands of dollars over the life of the loan.
Imagine your current auto loan balance is $15,000 and you have 19 percent APR and 48 months left on your loan. From now on, you will pay an additional $6,528 in interest before your loan is repaid in four years.
However, if your credit score has improved, you may qualify for a new car loan at a better rate. For example, by refinancing into a new 48-month auto loan at 9 percent per annum, you can cut your future interest costs by more than half to just $2,917 while lowering your monthly payment.
Cons: You may pay more interest over the life of the loan.
Before you take the steps to refinance your car loan, make sure you run the numbers with a car loan calculator so you can compare your total interest costs. Securing a lower interest rate or a lower monthly payment may be better in the short term, but you may end up paying more interest on the loan due to the longer term.
Pros: Use whatever capital you have
Refinancing your car loan can also help you use any capital you have in your car. This can be a lifesaver if you need money in an emergency or just want to consolidate debt at a lower interest rate.
Just remember that, as highlighted above, refinancing can mean higher interest paid over time, even if you get a lower rate.
Cons: refinancing is not free
Finally, don’t forget that auto loan refinancing usually comes with a fee. These fees will vary depending on the auto lender you work with, but they may include an application fee, a issuance fee, and an auto hold transfer fee.
Also, make sure your original car loan doesn’t charge any prepayment penalties that will take effect if you refinance your loan.
Should you refinance your car loan?
Only you can decide whether it makes sense to refinance a car loan. It’s possible that switching to a new loan could save you money on interest and/or leave you with a lower monthly payment, but it’s also possible that the new loan will make you pay. more interest as well as more fees with time.
Before moving forward, make sure you check the numbers, but only after comparing automatic refinancing offers from at least three different lenders. By comparing multiple lenders, you will increase your chances of getting a new car loan that will make you a better person.
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