Over the last decade, the growing cost of new and used automobiles has increased the size of the average car loan. To compensate for this, auto lenders have begun to offer lengthier automobile loans, allowing customers to borrow more while making a smaller monthly payment.
According to Experian’s State of the Automotive Finance Market, the average new car payment was $554 in the first quarter of 2019, while the average used car payment was $391 per month. Worse, the average new auto debt totaled $32,187, while the average used car loan was $20,137. Meanwhile, the average loan duration for new automobiles was more than 68 months and over 65 months for used vehicles.
It’s never enjoyable to owe money on a car, but borrowing too much (or for too long) might make you wish you had a different auto loan. This is especially true if your loan has a high interest rate due to poor credit when you applied.
If you’re on the fence about refinancing your car loan, it’s important to understand how this change might benefit or cost you. Here’s all you should know.
Pro: You can get a cheaper monthly payment.
Depending on the terms of your initial loan, refinancing your auto loan may result in a cheaper monthly payment that you can more easily manage. This might be useful if you’re having trouble keeping up with your current payments or just need additional wriggle room in your monthly budget.
With a smaller monthly payment, you may be able to better manage your living expenditures and other bills. If you want to retain your automobile for a long time, you may be willing to prolong your payback period in order to minimize your monthly cost.
Con: You may prolong the payback timeline.
Getting a reduced monthly payment might be beneficial to your budget, but keep in mind that you will most likely be paying on your auto loan for months or years longer than you would otherwise. And this can have unanticipated financial ramifications down the road.
This is especially true if you’re extending the loan on a secondhand vehicle that’s many years old. You might be trapped paying payments on an outdated car that breaks down and needs expensive repairs. Even if refinancing saves you money upfront, this might be a double whammy for your finances in the long run.
Pro: You might acquire a significantly cheaper interest rate.
Another potential benefit of refinancing is that you may be able to qualify for a reduced interest rate. If this is the case, refinancing your vehicle loan might save you hundreds — if not thousands — of dollars over the course of the loan.
Assume your current vehicle loan debt is $15,000, with a 19 percent APR and 48 months remaining on your loan. From this point on, you will pay an extra ,528 in interest until the loan is paid off in four years.
If your credit score has improved, you may be eligible for a new vehicle loan at a lower interest rate. By refinancing into a new 48-month auto loan at 9 percent APR, you might cut your future interest expenditures in half, to only $2,917, while also decreasing your monthly payment.
Cons: You may pay higher interest throughout the life of your loan.
Before you refinance your vehicle loan, be sure to run the figures through an auto loan calculator to assess your overall interest expenses. Securing a lower interest rate or lower monthly payment may be a better bargain in the short term, but you may end up paying more interest on your loan owing to a longer repayment period.
Pro: Access whatever equity you have.
Refinancing your auto loan might also let you access any equity in your vehicle. This might be quite helpful if you need money for an emergency or just wish to consolidate debt at a cheaper interest rate.
Remember that, as previously said, refinancing may result in higher interest payments over time, even if you acquire a reduced rate.
Cons: Refinancing is not free.
Finally, keep in mind that there are usually expenses associated with refinancing your auto loan. These expenses vary based on the vehicle lender you use, but they may include an application charge, an origination fee, and an auto lien transfer fee.
Also, verify sure your first auto loan does not include any prepayment penalties that will apply if you refinance.
Should you refinance your automobile loan?
Only you can determine whether refinancing your auto loan makes sense. Switching to a new loan may save you money on interest and/or result in a cheaper monthly payment, but it is also conceivable that a new loan will cause you to pay more interest and fees over time.
Make sure you do the numbers before proceeding, but only after comparing car refinancing offers from at least three lenders. Comparing various lenders increases your chances of getting a new vehicle loan that benefits you.
