Advantages and Disadvantages of Auto Loan Refinancing
In recent years, both new and used vehicle prices have surged, resulting in a significant increase in the average car loan amount. To accommodate borrowers, auto lenders have begun to extend the length of car loans, enabling individuals to access larger amounts at more manageable monthly payments.
According to Experian’s report on the Automotive Finance Market, the average monthly payment for a new car hit $554 in the first quarter of 2019, while used cars commanded an average payment of $391. Furthermore, the average loan for a new vehicle was pegged at $32,187, compared to $20,137 for used cars. Typically, new car loans averaged over 68 months, while used car loans were just under 65 months.
While dealing with auto debt can be stressful, borrowing excessively or committing to a longer loan term could leave you reconsidering your loan choice. This is particularly pertinent if the loan’s interest rate is high due to less-than-stellar credit at the time of application.
If you’re contemplating refinancing your auto loan, it’s crucial to evaluate how this decision might benefit or disadvantage you. Below is a comprehensive overview of what to consider.
Advantage: Lower monthly payment potential
Depending on your original loan terms, refinancing might lead to a decreased monthly payment that aligns better with your budget, which is especially beneficial if you’re currently struggling with your payments or need additional flexibility in your finances.
A reduced monthly payment can help you manage your other living expenses more comfortably. If you intend to keep your vehicle for an extended period, you may not oppose a longer repayment period in exchange for a smaller monthly cost. (See also: Lowering Your Car Payment Is Simpler Than You Think)
Disadvantage: Prolonged repayment duration
While a lower monthly payment can significantly improve your financial situation, it’s important to recognize that doing so often means extending the duration of your loan. This can lead to unforeseen financial complications in the future.
This concern is amplified when refinancing a used car that’s already several years old; you might find yourself paying off a vehicle that could be prone to breakdowns and costly repairs, which can adversely affect your finances.
Advantage: Lower interest rate access
A notable benefit of refinancing is the opportunity to obtain a better interest rate. If you qualify, this could result in considerable savings—potentially hundreds or even thousands of dollars throughout the loan period.
For instance, suppose your current car loan balance is $15,000 with an interest rate of 19 percent, and you have 48 months remaining. By the end of the term, you’d end up paying an additional $6,528 in interest.
However, if your credit score has improved, you might be eligible for a new loan with a lower interest rate. By refinancing to a 48-month loan at 9 percent APR, you could drastically reduce your interest costs to only $2,917, while simultaneously lowering your monthly payment.
Disadvantage: Potential for higher overall interest
Before proceeding with refinancing, running the numbers with an auto loan calculator is essential to compare total interest expenses. Although a decreased interest rate or lower monthly payment might seem beneficial right now, a longer loan duration can lead to increased overall interest payments.
Advantage: Access to existing equity
Refinancing may also allow you to access any equity you’ve built up in your vehicle. This can be particularly helpful during emergencies or if you’re looking to consolidate existing debt at a more favorable interest rate.
However, keep in mind that, as previously mentioned, refinancing could lead to higher total interest payments over time, even if you secure a lower rate.
Disadvantage: Fees associated with refinancing
Lastly, it’s important to remember that refinancing your car loan usually incurs various fees, which can differ by lender. These may include application fees, origination fees, or fees for transferring the auto lien.
Additionally, check whether your original auto loan imposes any prepayment penalties that might arise upon refinancing.
Is refinancing your car loan right for you?
Deciding whether or not to refinance your auto loan is a personal choice. While a new loan might offer lower interest payments or reduced monthly expenses, it could also result in increased overall interest and fees in the long run.
Be sure to crunch the numbers before making a decision, and consider obtaining quotes from at least three different lenders. Comparing offers will enhance your chances of finding a new auto loan that benefits you.
