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Pros and cons of refinancing a car: Is it right for you? Part Of Refinancing a Car Loan In this series Refinancing a Car Loan Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial choices by providing you with interactive financial calculators and tools, publishing original and objective content. This allows users to conduct research and compare information at no cost to help you make informed financial decisions. Bankrate has agreements with issuers, including but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The deals that are advertised on this website are provided by companies that compensate us. This compensation may impact how and when products are featured on this website, for example for instance, the sequence in which they be listed within the categories of listing in the event that they are not permitted by law. This applies to our mortgage home equity, mortgage and other products for home loans. This compensation, however, does affect the content we publish or the reviews you read on this site. We do not cover the universe of companies or financial deals that might be available to you. Westend61/Getty Images
4 min read Published March 02, 2023.
Written by Rebecca Betterton Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in understanding the details of borrowing money to purchase an automobile. The article was edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate since late 2021. They are committed to helping readers gain the confidence to manage their finances by providing clear, well-researched information that simplifies complex topics into manageable bites. The Bankrate guarantee
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We are compensated in exchange for the placement of sponsored products and, services, or through you clicking specific links on our site. Therefore, this compensation may influence the manner, place and in what order products appear within listing categories, with the exception of those the law prohibits it for our mortgage, home equity and other home loan products. Other factors, such as our own rules for our website and whether or not a product is offered in the area you reside in or is within your self-selected credit score range can also impact how and where products appear on this website. While we strive to provide a wide range offers, Bankrate does not include information about each credit or financial product or service. Costs of maintaining your vehicle in the garage each month is a challenge for many. Monthly payments on cars have gone up to an average monthly installment of $526 for vehicles that are used and $716 for those who purchase new . A lot of people think about the possibility of replacing their current loan by a new one in order to make the costs less burdensome. Refinancing could lower your monthly payments depending on whether your circumstances have changed or the market has changed since you obtained the current loan. However, refinancing comes with risk and can be more expensive in certain instances. It is therefore important to think about the advantages and disadvantages of refinancing and analyze your finances to determine if it’s the right move. The advantages of refinancing your car The your current auto loan center around saving money. You might also be able to refinance more than what you owe, if you need cash. Think about these factors when deciding whether refinancing is suitable for you. Lower interest rates Your interest rate is a significant factor in your monthly auto loan payment. The amount you pay is determined by your credit score, among other things. If you’ve taken out your loan and you’re not sure, this could be the case if you’ve been making punctual loan payments and effectively dealt with various debts. It might be a great opportunity to look into refinancing. You will likely receive better terms and rates. Lower monthly payments If you struggle to meet your monthly payments Refinancing your mortgage can help make your monthly payments less expensive and help you make more money available in your budget. You can choose an interest rate that is lower or a longer time frame, or both. However, while the signing off of a loan means you can save money every month, it can also result in an increase in the total cost since you’ll pay more in interest over the life that of the loan. Pay off your loan sooner Refinancing can be a way of paying off your loan earlier. If your earnings have increased after taking out your auto loan then it could be a good idea to switch to a shorter-term. If you pay off your loan early, you’ll save on interest — assuming the lender’s interest doesn’t exceed your savings. If you don’t want to refinance, then you can pay more in monthly installments to lower the balance more quickly. The same goals will be achieved and could reduce costs by avoiding charges for origination that can be associated with refinancing. Get cash fast Some lenders offer the option of a cash advance, which is beneficial for those who require cash fast. It works the same as traditional refinancing, however instead of a new loan that is a replacement for your current loan, you’ll receive an unrestricted cash payment based on the equity you have in your vehicle. You could also get more favorable loan conditions or a lower monthly payment however, this kind of refinancing comes with risks. By pulling out the capital you’ve accumulated in cash, there’s a chance you’ll end up upside-down on your loan, owing more than the amount it’s worth. This makes it more challenging to make a profit should the time comes to dispose of. Additionally, you’ll incur extra debt, as the outstanding auto loan balance will be greater. Pros and cons of refinancing your automobile Pressing the by refinancing is not without risk. Be aware of the disadvantages. The high interest rate of refinancing has the potential of higher interest rates. If your credit rating has dropped or interest rates have risen, you may discover interest rates that are higher than the current rate. In the current economic climate, steep interest rates aren’t unusual. Recent events have driven interest rates up to new records. So, it’s in your best interest to shop around for different options to stay away from the sky-high rates, or just wait until market conditions improve. Additional fees If you are facing financial difficulties, remember that refinancing your loan comes with extra fees. The costs could include application, prepayment, title transfer and origination charges. Since the costs can add up, calculate how much the refinance will cost you , and also how the rate and duration compare to your current loan. It could be upside down if you refinance and extend your loan’s term, you are likely to end up owing more than your vehicle’s worth. This is often described as being in default on the wrong side of your loan. How to determine whether refinancing your car an excellent idea? The main factor to determining whether it is an appropriate choice comes down to the amount of money you can potentially save. Be sure to weigh both the advantages and disadvantages before making use of the benefits . Here are some scenarios where it might make sense to refinance: Your credit improved. When your score is better, you could be offered better rates and terms by refinancing. You received dealer financing. The terms typically offered through dealerships are not the most favorable. Explore other lending options in case you are currently . It is impossible to make payments . Missing payments can result in charges, damaged credit, or even being able to take possession of your car. If you are unable to make your payments then refinancing could result in lower monthly payments. You qualify for a better interest rate. If rates are higher than they were when you first applied, you may qualify for an interest rate that is lower. But, that’s not likely to be the case because the market rate isn’t decreasing because of recent Fed rate increases. If you’re considering refinancing your auto loan, start by shopping around with multiple lenders to find the best available rate. Many offer pre-qualification tools on their websites, which allow users to see potential loan offers, including estimated loan terms, interest rates and monthly payments, all without impacting your credit score. You should consider getting pre-approved by more than three banks before you can formally apply with confidence. The next step is to, prior to looking for , weigh the advantages and disadvantages of each and the way they can help you make an informed choice. Ideally, you want to save money rather than simply stretching out your loan time. If you’re struggling financially it might be beneficial to consider an easier monthly auto loan installment. Ask the lender to trade your vehicle in and selling the vehicle privately to get the relief you need. If refinancing is the right option for you, for the most reliable auto lender.
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She specializes in assisting readers in navigating the ways and pitfalls of borrowing money to purchase a car. Written by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping readers gain confidence to control their finances by providing concise, well-studied and well-researched content that break down complex subjects into bite-sized pieces.
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