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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 mission is to help you make smarter financial decisions by offering interactive tools and financial calculators that provide objective and unique content. This allows you to conduct your own research and compare information at no cost and help you make informed financial decisions. Bankrate has agreements with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site come from companies who pay us. This compensation may impact how and where products appear on the site, such as for instance, the order in which they may appear within the listing categories, except where prohibited by law. Our mortgage home equity, mortgage and other home lending products. However, this compensation will not influence the information we publish, or the reviews you read on this site. We do not cover the universe of companies or financial offerings that could 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 is an expert with the ins and outs of securely taking out loans to purchase a car. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers gain the confidence to manage their finances with precise, well-studied and well-researched data that simplifies complicated subjects into digestible pieces. The Bankrate promise
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Therefore, this compensation may impact how, where and when the products are listed within categories, unless it is prohibited by law for our mortgage home equity, mortgage and other home loan products. Other factors, like our own rules for our website and whether a product is available in your region or within your own personal credit score can also impact the way and place products are listed on this website. We strive to offer an array of offers, Bankrate does not include details about every credit or financial products or services. Costs of maintaining your car on the road each month can be a burden for many. The monthly payments for cars have soared with an average monthly payment of $526 for used vehicles and $716 when you purchase new . Many people are considering either replacing or refinancing their current loan with 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. But refinancing is not without risk and can be more expensive in some cases. Therefore, you should think about the advantages and disadvantages of refinancing and assess your financial situation to decide if it's a wise decision. Benefits of refinancing your vehicle Your current car loan focus on saving you money. You may also be able to refinance more than you owe if you need cash. Take these into consideration when deciding whether refinancing is the right option for you. Lower interest rates The rate of interest greatly affects the monthly auto loan payment. The amount you pay is determined by the credit rating of yours, in addition to other elements. If you've taken out your loan or credit card, which is the case if your have made punctual loan payments and effectively managed your various debts. It could be a good time to explore refinancing options. You will likely receive better terms and rates. Reduced monthly payments If you struggle to meet your monthly obligations refinancing could make your monthly payment less costly and let you free up money in your budget. You can get a lower rate and a longer duration or both. While taking a decision to sign off on a loan is a way you can save money every month, it also means more cost overall as you'll be paying more interest over the course that of the loan. Make sure you pay off your loan faster Refinancing may result in the repayment of your loan in a hurry. If your income has increased following the purchase of your auto loan, it may be an ideal time to refinance to a shorter-term. If you settle your loan in advance and pay off interest, you'll save -- assuming the lender's doesn't outweigh the savings. But if you'd prefer not to refinance, you could pay more in monthly installments to lower the balance more quickly. This will accomplish the same goal and may reduce costs by avoiding origination fees that may accompany refinancing. Cash in quick time Some lenders offer this service, which is ideal if you need fast cash. It's similar to traditional refinancing, but in addition to a new loan that is a replacement for your current loan, you'll get an unrestricted cash payment based on the equity in your car. In addition, you could get better loan terms or a lower monthly installment This type of refinancing comes with risk. If you take equity you've built up in cash, it's possible that you'll become upside-down in your loan which means you'll be owing more than the amount it's worth. This can make it harder to turn a profit if it's your intention to market. Plus, you'll take on extra debt, as your outstanding auto loan balance will be higher. Cons of refinancing your car The process of refinancing not without risks. Consider these disadvantages. A high interest rate when refinancing comes with the risk of higher interest rates. If your credit rating has dropped or rates have increased there is a chance that you'll encounter interest rates that are more expensive than your current one. In the current economic climate, steep interest rates aren't unusual. Recent developments have led to interest rates reaching record highs. It's therefore recommended that you look around for various options to do your best to stay clear of astronomically high interest rates, or just wait until market conditions improve. Additional fees If you are in a tough financial situation, remember that refinancing your loan comes with extra fees. The costs could include application for prepayment, prepayment, title transfer and origination fees. Because the fees are likely to add up, you should calculate the amount the refinance costs you and what the term and rate compare to the current loan. The loan could become upside down if you refinance and prolong your loan's duration in any way, you're more likely to be paying more than the value of your car is worth. This is often called being on the other side of your loan. What are the best ways to determine if refinancing your car is a good idea The key to determining if it's an option that is worth your time is the amount of money you can potentially save. Weigh your pros and cons of making use of the benefits . Here are some scenarios where it might make sense to refinance: Your credit improved. If your credit score has improved, you could receive more favorable terms and rates through refinancing. You received dealer financing. Typically, the terms provided through dealers are not the most favorable. Consider other loan options in case you are currently . There is no way to pay . In the event of a missed payment, it could result in fees, damaged credit or worse, taking possession of your vehicle. If you are unable to make your payments then refinancing could result in a lower monthly payment. You can qualify for a lower interest rate. If rates are higher than when you first applied, you may qualify for an interest rate that is lower. However, this likely isn't the case because the market rate isn't trending downward because of recent Fed rate hikes. If you're considering refinancing your auto loan begin by looking for lenders across the market to find the best available rate. A lot of them have pre-qualification tools available on their websites that allow you to view potential loan offers, including estimates of loan conditions including interest rates, terms and monthly payments, without affecting your credit score. It is recommended to get pre-approved with more than three banks before you can make a formal application with confidence. Prior to deciding on the pros and disadvantages of each and the way they apply to you to make an informed decision. In the ideal scenario, you would like to save money instead of simply stretching out your loan duration. If you're struggling financially it might be beneficial to consider an easier monthly auto loan payment. Request the lender to consider trading your car as well as selling privately for the financial relief you require. If refinancing is the best option for you, then look for the best auto lender.
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Written by Auto Loans Reporter Rebecca Betterton is the auto loans reporter for Bankrate. She is a specialist in helping readers in navigating the details of borrowing money to buy an automobile. Edited by Rhys Subitch Edited by Auto loans editor Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers gain confidence to control their finances with precise, well-studied information that break down complex topics into digestible chunks.
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