Refinancing a car loan can be helpful if you need to save money right away for an emergency or because of a sudden drop in income. It can also be beneficial if your credit score has improved since you took out your first vehicle loan, as you may be eligible for higher interest rates.
Either way, it is crucial to know the advantages and drawbacks before jumping in.
What is Auto Refinancing?
According to Lantern by SoFi, “auto refinancing is a type of loan that allows you to pay off your existing auto loans and take on new debt with better terms or lower interest rates.” This can be beneficial if the money saved from lower monthly payments will help pay off other debts, such as credit cards, student loans, mortgages, and more. Auto refinance may also result in lower insurance premiums since the car’s value has increased (you could get fewer years’ worth of coverage).
Improve Your Cash Flow
One of the biggest pros to refinancing an auto loan car is that you can often get a lower interest rate, which means smaller monthly payments. This can free up cash flow that you can use for other things in your life.
Lower Your Monthly Payments
If refinancing results in a lower interest rate, it will also mean lowered monthly payments. This could be helpful if you’re struggling to make ends meet every month or have other high-interest debt that you’re trying to pay off.
Consolidate Debt
Refinancing a car loan can also help consolidate debt. If you have several loans with different interest rates, consolidating them into one loan with a lower interest rate can save you money over time.
Shorten the Length of Your Loan
Another benefit of refinancing is that you can often shorten the length of your loan, which will save you money in interest payments.
Higher Monthly Payment
Of course, there is also the potential downside to refinancing: you could end up taking on a higher monthly payment. This could happen if you extend the length of your loan or take on a lower interest rate but have a higher overall cost for the car.
Understand the Costs of Refinancing
It’s crucial to weigh the benefits of auto refinancing against any increase in tax liability resulting from deducting part of the total cost paid for by refinanced funds—it might make sense not to pursue this option at all.
Although many pros are involved in refinancing a car, there are also some cons.
For example, refinancing may result in a lower interest rate but might cost you more overall if the new loan is for an extended period than your current one; it may cost even more in the long run.
Besides, refinancing could be risky if taking on additional debt with worse terms or higher rates. This might leave you without enough funds in savings to cover an unexpected expense like needing repairs done to the vehicle immediately after applying for refinancing.
Ronald is a business editor who writes about various topics such as technology, health and finance. He works along with the colourful folks that build a nation through tech startups. He is also a professional football player and video games enthusiast.
