The Pros and Cons of Refinancing A Car Loan: Ultimate Guide

November 13, 2022

When it comes to a refinance car loan, there are both pros and cons to consider. A refinance car loan can save money on your current car loan by providing a lower interest rate. On the other hand, some potential risks are involved in refinancing, so it’s crucial to consider all the advantages and disadvantages before deciding whether or not to refinance.

With that said, how do you decide whether or not refinancing is right for you? The answer depends on your circumstances. Are you trying to talk to a financial advisor? Or lending institution about what options are available to you, and then make an informed decision based on your unique situation?

In this blog post, we’ll explore the pros and cons of refinancing a car loan in more detail so that you can make an informed decision about whether or not to refinance. Stay tuned!

Possible Pros of Refinancing a Car Loan

Lower Interest Rate

Interest rates on car loans are currently at an all-time low. If you financed your car when car loan rates were higher, refinancing your car loan could lower your monthly payment and save you money over the life of the loan.

Refinancing your car loan could also help you pay off your loan faster. When you refinance your car loan, you use the equity in your car to secure a new loan with a lower interest rate. Such a decision could lower your monthly payment and save you money on interest over the life of the loan.

It could also help you pay off your loan faster if you keep the same early repayment fees schedule. If you owe more than the car is worth, refinancing could help you get out of that debt.

Refinancing could also help if you’re struggling to make your monthly payments or are behind on payments. Refinancing can give you a fresh start with a new car loan interest rate and repayment schedule.

Keep this in mind. If you extend the loan length, you may pay more interest over time. However, that refinancing comes with some risks.

And if you miss payments on a refinanced loan, it could damage your credit score. Mind you, refinancing is only suitable for some. But if done carefully, it can be a smart way to save money and become debt-free sooner. Talk to your lender about whether refinancing makes sense for you.

Longer Loan Term

One possible pro of refinancing a car loan is extending your loan term. Doing this could increase the chances of getting approved for refinancing and lower your monthly payments. A longer loan term could also help improve your credit score by showing that you can make payments over an extended period.

Additionally, a longer car loan term could reduce the total interest you pay over the life of the loan. However, a longer loan term will likely also mean that you’ll be making payments on your car for extended periods.

Add or Remove a Co-Signer

Depending on your current lender, you can add or remove a co-signer from the loan. Such an action could be beneficial if the co-signer has improved their credit score since taking out the loan or if they can no longer make payments.

If you want to remove a co-signer, you will likely need to find a new lender, as only some will allow you to do so. However, this could free up extra monthly cash as you will no longer be responsible for making two separate loan payments.

Remember that refinancing will likely come with ongoing fees and may affect your interest rate. So, it is crucial to speak with your lender to see if it is the right move for you.

Get a New Lender

One of the main advantages of refinancing is getting a new lender. When you refinance a car loan, you’re essentially trading your current loan for a new one with different terms. Suppose your credit score has improved since you took out your original loan. In that case, you may qualify for a lower interest rate and better terms.

Also, suppose you initially financed your car through a bank or credit union. In that case, you can get a more favourable loan from an online lender. 

When shopping around for a new loan, comparing loan offers from multiple lenders is necessary to see that you get the best deal possible.

Refinancing can be a great way to save money on your car loan. Still, it’s meaningful to understand the pros and cons before deciding.

Potential Cons of Refinancing a Car Loan

More Interest Value

One potential downside to refinancing a car loan is that you may pay total interest over the life of the loan. This is because, when you refinance, you generally have to take out a new loan with a higher interest rate.

Before you decide to apply to refinance your car loan, compare the total interest you will pay under the new loan to the amount you would pay under your existing loan. Otherwise, you may end up paying more money in the long run.

In simple words: New Interest Loan Rates VS Current Interest Loan Rates. If you end up paying higher (New Interest Loan Rates), you should consider revising your decision.

Entry and Exit Fees

Another potential disadvantage of refinancing a car loan is that you may have to pay extra fees. These can include an application fee, an appraisal fee, a publication fee, and a prepayment penalty. If you have to pay any of these fees, they will add to the cost of refinancing your loan. In some cases, the prices may be so high that refinancing your loan doesn’t make sense.

You also may have to pay an exit fee if you want to repay your loan early. This is sometimes called a prepayment penalty or an early repayment fee. Exit fees are usually a percentage of the amount you borrowed, so that they can add up to a lot of money.

You should check the terms and conditions of your loan before you agree to anything. If there is an exit fee, ensure you understand how much it is and whether you are willing to pay it.

Car Loan Refinancing Options

Like most car owners, you probably cringe at going through a car loan refinancing process. It can be long, tedious, and downright overwhelming. However, it doesn’t have to be that way! We’ll break down all the basics of car loan refinancing so you can make an informed decision about whether or not it’s right for you.

Fixed Car Loan Refinancing Options

With this type of car loan, your repayments will remain the same every month for the entire car loan term. This can help you budget for your car loan repayments, as you will know exactly how much you need to set aside each month.

A fixed-rate car loan also gives you the peace of mind of knowing that your repayments will not attract extra costs even if interest rates rise in the future. However, you may pay slightly more overall with a fixed-rate car loan than a variable-rate car loan, as lenders often charge a premium for the first option’s stability.

Variable Car Loan Refinancing Options

Consider a variable-rate loan if you’re looking to refinance your car loan. With a variable-rate loan, your interest rate will keep fluctuating along with the market rates.

Your monthly car loan repayments could go up or down depending on the economic conditions. While this may seem risky, it can offer some benefits.

First, you may get a lower interest rate if rates are low when you refinance. Secondly, if rates rise in the future, your car loan repayments will only increase by a small amount each month rather than all at once.

It will make budgeting for your car loan repayments more manageable and ensures that a sudden rate jump won’t catch you off guard. Of course, before you refinance into a variable-rate car loan, you must speak to a financial advisor to ensure it’s the right decision for you.

Secured Car Loan Refinancing Option

This refinancing option typically offers lower interest rates than an unsecured loan, making it a good choice if you want to save money on your monthly payments. When you refinance your car loan, you’ll need to provide some collateral, such as your car’s title or a deed to your home.

The lender will use this collateral to secure the loan, which means that if you default on the loan, they have the right to take possession of the collateral. However, because the loan is secured, the lender is more likely to offer favourable terms, such as a lower interest rate. If you’re considering refinancing your car loan, compare secured and unsecured loans to see which option is best for you.

Unsecured Car Loan Refinancing Options

One of the main benefits of an unsecured car loan is that it can help you save money on interest. Unsecured car loans can be a good option for borrowers with no collateral or who do not want to put their car up as collateral. Unsecured car loans can also be a good option for borrowers trying to pay off the loan early.

You can qualify for a lower interest rate with good credit than a secured loan. This can help you save money over the life of your loan. Another benefit of an unsecured car loan is that it can help you repay it faster.

Without worrying about collateral, you can focus on making your monthly payments on time and paying your principal balance. This can help you pay off your loan sooner and save money on interest.

Steps on Car Loan Refinancing

Are you curious about car loan refinancing? The process can be daunting, but it’s worth doing if you can save money on your monthly payments. We’ll outline the steps you need to take to refinance your car loan and get a lower interest rate.

Get Current on Your Loan

If you’re considering refinancing your car loan, one of the first steps you’ll need to take is to get current on your monthly repayments. This means making your payments on time, every time, for at least a few months in a row.

Late or missed payments can damage your credit score, making it more challenging to qualify for a refinance. Once you’ve made a few on-time monthly payments, you’ll be in a much better position to refinance your car loan and save on interest.

Find Existing Car Loan Amount

You must look at your most recent loan statement to find the existing loan amount. Information should list the outstanding balance and any other fees or charges applied to the account.

You must add all the balances together to get the total loan amount if you have multiple loans on the vehicle. Once you have found the existing loan amount, you can begin shopping around for a new loan with better terms.

Remember that you will need to pay any remaining balance on the old loan before you can complete the refinancing process.

Shop Around For Car Loan Refinancing

Once you have the outstanding car loan, you can start shopping for a new loan. Be sure to compare car loan terms and rates from several different lenders before choosing one.

Also, take note of any prepayment penalties that may apply to your current car loan before you refinance. By doing your homework, you can ensure that you get the best car loan refinancing deal possible.

Evaluate Fees

Before you refinance your car loan, you must evaluate all the fees involved. This includes the application fee, origination fee, and any prepayment penalties.

You’ll also want to compare the interest rates and terms different lenders offer. You can save money in the long run by doing your homework.

Apply For Car Loan Refinance

Now that you have followed all the necessary steps to prepare for refinancing your car loan, it is time to take the final action and apply for it. The process of applying for refinancing is very similar to the process of applying for a new car loan.

You will need to fill out an application with your personal and financial information, and you will also need to provide documentation about your current car loan.

Once you have submitted your application, the lender will review your information and decide whether they can offer you a lower interest rate. If approved, you can choose the new loan terms that best suit your needs.

Frequently Asked Questions

Why Should I Refinance My Car Loan?

Refinancing a car loan can save you money in a few different ways. First, interest rates have decreased since you got your original loan. In that case, you may get a lower rate by refinancing.

Second, suppose you initially took out a loan with a longer term. In that case, you can reduce your monthly payments by refinancing for a shorter period. Or, if your financial situation has improved since you got your original loan, you can refinance for a lower interest rate and/or monthly payment.

How Does Car Loan Refinancing Work

Car loan refinancing is when you replace your current car loan with a new one, usually from a different lender. The new loan pays off the balance of your old loan, and you start making payments on the new loan. When done correctly, car loan refinancing can save you money on interest and lower your monthly payments. Here’s how it works:

First, you’ll need to shop around for a new loan. Be sure to compare interest rates and terms before deciding on a lender. Once you’ve found a good deal, you’ll need to apply for the loan and get approved.

Once you have your new loan, the next step is to pay off your 

old one. You can do this by writing a check or transferring the funds electronically. Be sure to include any fees or prepayment penalties in the amount you send to pay the balance in full.

Finally, start making payments on your new loan according to the terms of the agreement. If you keep up with the costs, you’ll be on your way to saving money on interest and lowering your monthly car payment.

What Is a Balloon Payment?

Balloon payments are often used in car loan refinancing. This is when you refinance your car loan and make a lump-sum payment at the end of the loan term. The balloon payment is typically equal to the remaining balance on loan.

For example, if you have a $20,000 loan with a 60-month term, you can refinance it after 36 months and make a balloon payment of $14,000 at the end of the new loan term. Balloon payments can be beneficial because they allow you to pay off your loan early and save on interest.

However, you must be sure you can afford the balloon payment when it comes due. Otherwise, you may find yourself upside down on your loan, which could lead to financial difficulties.

When Should You Refinance?

There are a few different reasons someone might want to refinance their car loan. One reason might be if the person has improved their credit score since they took out the loan. A higher credit score could help them secure a lower interest rate, saving them money over the life of the loan. Another reason to refinance might be if the car’s value has decreased.

Someone might want to refinance to shorten the term of their loan. This would increase their monthly payments but also save them money in interest over time. This would mean that the person owes more on the loan than the car is worth, and they might want to refinance to avoid being upside down on their loan.

How to Compare Refinance Rates

When shopping for a refinance loan, it’s essential to make a comparison table to compare rates from multiple lenders. There are a few different ways to do this.

One option is to use an online rate comparison tool. These tools allow you to input your loan amount, credit score, and other factors and then see rates from multiple lenders side-by-side. This can be a helpful way to compare rates quickly and find the best deal.

Another option is to contact each lender directly and ask for a quote. This may take more time, but it can be worth it if you can negotiate a lower rate.

You can also ask your current lender if they offer discounts for existing customers who refinanced. Some lenders will offer special deals to loyal customers to keep their business.

Remember that the lowest rate is only sometimes the best deal. Be sure to compare other factors like fees, loan terms, and customer service before you choose a lender.

Conclusion

Regarding car loan refinancing, there are pros and cons to weigh before making a decision. On the plus side, refinancing can lower your monthly payments and save you money in the long run.

However, If you extend the length of your loan or take on a higher interest rate. In that case, you could pay more than if you’d left your original loan alone. So how do you know whether refinancing is right for you? Contact us today – we’re happy to help! We have many car loan options for you, including a used car loan, a bad credit car loan, and many others. All you need to do is fill up the finance enquiry form!