If you have a car loan, you may be wondering “Should I refinance my car?” It’s always smart to shop around for better deals on things like loans, insurance products, and other financial services. However, there are both pros and cons of refinancing a car. Depending on your unique situation, you may have more pros than cons, or vice versa!
How does refinancing a car work in the first place? Let’s start by exploring the process, then move on to the pros and cons of refinancing a car and how to find auto loan refinance calculators to finalize your decision.
How Does Refinancing a Car Work?
First things first, how does refinancing a car work? Refinancing is basically trading your current loan for a new loan. In the eyes of the lenders, it’s as if you paid off your existing loan and opened a new one with brand-new terms.
Just like your lender did when they gave you your current loan, they’ll look at things like your:
- Credit history
- Other debts
They may also factor in:
- What kind of car you have and how old it is
- The size of the loan amount
- The length of the loan term
In short, these are all things that signal how risky it is to lend to you. If the lender deems you a risky borrower, you won’t be offered great refinance rates. But if they see you as someone who’s likely to repay their loan on time, you’ll probably be pleased with the terms you get!
Choosing the right lender when refinancing a car
So there are a few different ways to go about refinancing your auto loan. You could refinance with the same bank or lender you’re already using, or look for a new lender entirely.
If you’re happy with your current lender, you may want to stay with them. It could also be easier since you have a pre-existing relationship and they already have information about you.
On the other hand, switching lenders could get you a better rate. Getting multiple quotes can help you make the best decision! Explore some of these auto refinance lenders to see what they offer.
But before you explore lenders let's dive into our "refinancing a car: pros and cons list" to make sure refinancing is right for you.
Refinancing a car pros and cons
Before you can figure out if this is a good idea for your situation, it helps to understand the pros and cons of refinancing a car. Let’s take a look at both!
Pros of refinancing a car
There are a few different reasons why it might make sense to refinance your car. Let’s dive into some of the benefits of car refinancing.
Lower your interest rate
You could get a lower interest rate if one of these factors has changed since you got your loan:
- Market interest has lowered (Learn about federal interest rates here)
- Your credit score has improved (Here’s how credit works!)
A significantly lower interest rate is probably the best reason to refinance your car. It can save you a lot of money!
Pay the loan off faster
Refinancing can help you get a new term for your loan. Changing it to a shorter loan term would be helpful if:
- You want to pay the car off faster
- You can afford a little extra per month
If you’re on a mission to pay off all your debt quickly, this idea could be appealing. Here are some tips for deciding whether to pay off debt or save!
Decrease your monthly payment
On the flip side, what if you’re struggling to fit your current monthly payments into your budget? In that case, choosing a longer loan term can lower your monthly payments.
Even if you don’t want to extend your loan term, your refinanced monthly payments could still decrease. That’s the beauty of lowering your interest rate! (Auto loan refinance calculators will show you how much you can save—we’ll look at those in a minute.)
Tap the equity for cash in an emergency
With a cash-out refinance, you replace a smaller loan with a bigger loan and receive the difference in cash. For instance, if you currently owe $6,000 on your car and it’s worth $10,000, you could do a cash-out refinance for the full $10,000. That leaves you with $4k in cash.
The downside: you walk away with a higher loan and essentially have to start from scratch. However, if you truly need the money for an emergency, it’s a valid option that could save you stress.
Cons of refinancing a car
Refinancing a car isn’t the right decision for everyone. Here are some cons that may or may not outweigh the pros for you.
You’ll likely pay refinancing fees
How much does it cost to refinance a car loan? It depends on the lender and the terms of both your current and new loans. The state you live in affects certain fees as well, so make sure to consider that.
Here are some of the refinancing fees you may expect to see:
- Early termination fee: may be charged by your previous lender for ending that loan early.
- Application or processing fees: your current and new lenders may charge some form of transaction fees. These are usually low, and some lenders may waive them if you ask.
- Title transfer fee: a fee charged to move your car’s title from the old lender to the new one.
- Registration fee: some states make you re-register your car after a refinance. This can be as low as $10 or as high as a couple hundred dollars.
All of these fees vary depending on your lenders and location. Make sure to read your contract and talk to your lender to figure out if there are penalties to change your loan. Look up your state refinance requirements as well!
You could pay more over time
If you extend your loan term, you could very easily end up paying more in interest. Even if your interest rate drops, it might not be enough to compensate for the extra time. Loan calculators can crunch these numbers for you.
You could go “upside down” on the loan
Being “upside down on a loan” is a term for owing more than the car is worth. This becomes a risk if you lengthen your loan term, or take out a larger loan.
When you’re upside down (also called “underwater”) on a loan, you’ll have to pay the difference as a lump sum if you sell or trade-in the car before the loan ends.
Your credit score will temporarily dip
Because refinancing is essentially replacing an old loan with a new loan, it does impact your credit. When lenders check your credit, it counts as a “hard inquiry,” which can temporarily lower your credit score for about 1-2 years.
This isn’t a huge issue for most people. The exception is if you need your credit score to be as high as possible in the near future. For instance, maybe you’re planning to buy a house and don’t want to do anything to drop your credit!
Should I refinance my car?
When it comes to financial decisions, information is your best friend. Start by weighing all the pros and cons of refinancing a car above and getting quotes from various lenders.
Once you have a few quoted offers in hand, you can plug the information into auto loan refinance calculators to see how much you can save (or not save).
Refinancing a car calculator
You can use auto loan refinance calculators to compare your current loan with the new refinance terms you’re considering.
Check out this refinancing a car calculator from Bank of America. You’ll enter your current loan balance, monthly payment, and interest rate, then the amount, rate, and term for the new loan.
From there, it’ll do the work for you! The result will show you what your new monthly payment would be, how much you’d save per month, and how much total interest you’ll save over the life of the loan. This can make your decision much clearer.
Here are a couple more auto loan refinance calculators to try:
Consider the pros and cons of refinancing a car before you proceed
Remember to consider the pros and cons of refinancing a car before you decide. However, a great refinance deal can save you thousands of dollars, so it’s certainly worth exploring. If it turns out that refinancing isn’t worth it for you, then at least you tried!
Perhaps it would be best for you to work towards paying off your auto loan quicker instead. Either way, always do what's best for you financially in the end.