Your Money Working Harder
Over the last decade, the rising costs of new and used cars have significantly increased the average car loan amount. In response, auto lenders have begun offering longer loan terms, allowing consumers to borrow more while keeping monthly payments manageable.
According to the State of the Automotive Finance Market from Experian, the average new car payment was $554 in Q1 of 2019, while the average used car payment stood at $391. The average new car loan reached $32,187, and the average used car loan was $20,137, with loan terms exceeding 68 months for new cars and nearly 65 months for used cars.
While owing money on your car is never enjoyable, borrowing excessively or for extended periods can lead to regrets about your auto loan. This is particularly true if your loan carries a high interest rate due to poor credit at the time of application.
If you’re contemplating refinancing your auto loan, understanding the potential benefits and drawbacks is crucial. Here’s what you need to know.
Pro: You Could Secure a Lower Monthly Payment
Refinancing your car loan might allow you to secure a lower monthly payment, making it easier to manage your budget. This is especially beneficial if you’re struggling to keep up with your current payments or need more flexibility in your finances.
A reduced monthly payment can help you stay on top of living expenses and other bills. If you plan to keep your car long-term, extending your repayment timeline to lower your monthly payment may be a worthwhile trade-off. (See also: Cutting Your Car Payment Is Easier Than You Think)
Con: You May Extend Your Repayment Timeline
While a lower monthly payment can be advantageous, it often means extending the duration of your loan. This can lead to unforeseen financial challenges down the line.
This is particularly concerning if you refinance a used car that is already several years old. You may find yourself making payments on an aging vehicle that could require costly repairs, creating a financial burden despite the initial savings from refinancing.
Pro: You Could Get a Much Lower Interest Rate
Another benefit of refinancing is the potential to qualify for a lower interest rate. This could save you hundreds, or even thousands, over the life of your loan.
For instance, if your current auto loan balance is $15,000 at a 19% APR with 48 months remaining, you would pay an additional $6,528 in interest before the loan is settled. However, if your credit score improves and you refinance at a 9% APR, your interest costs could drop to just $2,917, while also lowering your monthly payment.
Con: You Might Pay More Interest Over the Life of Your Loan
Before refinancing, it’s essential to use an auto loan calculator to compare total interest costs. While a lower interest rate or monthly payment may seem appealing, a longer loan term could result in higher overall interest payments.
Pro: Tap into Any Equity You Have
Refinancing can also enable you to access any equity in your car, which can be beneficial for emergencies or for debt consolidation at a lower interest rate.
However, keep in mind that refinancing may lead to more interest paid over time, even if you secure a lower rate.
Cons: Refinancing Isn’t Free
It’s important to remember that refinancing typically incurs fees, which can vary by lender. These may include application fees, origination fees, and auto lien transfer fees.
Additionally, check if your original loan has any prepayment penalties that could apply if you decide to refinance.
