What Are the Pros & Cons of Refinancing a Car Loan?

Refinancing a car loan has advantages and disadvantages.

Refinancing your auto loan is essentially paying off your current auto loan and taking out a new loan. It might make sense for you to do this, but you should learn all the pros and cons first.

Considerations

If interest rates are down from when you purchased your car or if your credit score is better, you might want to refinance to get a better interest rate. You could save hundreds or thousands of dollars in interest charges, depending on how much lower your interest rate is, according to the Cars Direct website.

Benefits

If you owe less than what the car is worth, you could get cash back when you refinance. The lender loans you money for what the car is worth. You can pay the amount you owe, keep the leftover cash and begin making your new monthly payments.

Warning

The downside of refinancing is that because you are essentially beginning a new loan, you are paying mostly interest again and little principal. In some cases, by starting a loan again, you might put yourself in a negative equity position, whereby you owe more on the car than what it is worth. You can opt to refinance for a short term to avoid this from happening.

References

• Go Banking Rates: Pros and Cons of Refinancing an Auto Loan
• Cars Direct: Refinance My Car