Pros and Cons of Refinancing a Car
After properly analyzing the pros and cons of refinancing your car, the Jerry app can help you take the leap—learn about the easy and efficient process here!
Written by Drew Waterstreet
Reviewed by Jessica Barrett
Table of Contents
- What does refinancing a car mean?
- Pros of refinancing your car
- Cons of refinancing your car
- Is refinancing the right move for you?
- How to quickly and easily refinance your car loan
Load full table of contents
Ultimately, refinancing your car is a payment strategy to help you save money or rebalance your budget. But, if you don’t properly weigh the pros and cons, you could end up paying more in the long run!
Every little detail counts when it comes to credit scores, interest rates, and loan terms. So before heading to your lender, you’ll want a clear understanding of how these factors impact your ability to access the benefits of refinancing.
To break that down into more actionable terms, the experts at
Jerry
, the trustworthy super app
for saving money on your car insurance
, have created this guide to the pros and cons of refinancing your car. Let’s see if it’s the right option for you!What does refinancing a car mean?
Refinancing your car simply means finding a new (and hopefully more favorable)
car loan
for your vehicle to replace your current one. If you find yourself in one of these possible scenarios, it may be time to consider refinancing:- A higher credit score. You can likely receive more favorable rates and terms if your credit score has improved since your initial loan.
- Alternative options. Loans from the dealership aren’t always the most favorable. Refinancing can get you access to better lending options.
- Missing payments. Reaching this point can result in financial penalties and/or damage to your credit score. Refinancing can help realign your loan with your current payment capacity.
But just because you can refinance your car loan doesn't mean you should. So let’s dive into the pros and cons of refinancing that you should consider before signing the dotted line.
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Pros of refinancing your car
When refinancing your car loan, there are quite a few ways to get to the same place—the same place being savings on the tenure of your loan. And honestly, any avenue of saving money is a big pro! So let’s break down each one in detail.
You can get a better interest rate
Background knowledge: Interest rates that are available to you are highly dependent on your credit score. This is because your credit score directly correlates to your reputation of paying back loans in full and on time.
So, if your credit score has improved since purchasing the vehicle initially, you may have access to better rates. And lowering your interest rate by as little as 1% can save you a substantial amount on the tenure of your loan.
MORE: What is a good credit score?
You can reduce your monthly payment
Refinancing to reduce your monthly payment is more like a band-aid than a perfect solution.
Sure, you’ll be able to free up extra cash flow to tackle higher-rate debts or navigate a period of financial difficulty. However, you’ll also extend the term of your loan, which typically means paying more interest over the lifetime of the loan. Nevertheless, the flexibility to do so is a benefit in itself.
You can leverage the equity in your car
This is less about saving money and more about using your vehicle as an avenue to instant cash flow.
Example: If you own a vehicle worth $18,000 (this is kind of irrelevant as long as you’re not
upside-down
on your loan) and have $6,000 remaining on the outstanding loan, you can refinance at $10,000 to instantly receive $4,000 in cash.Think of it as taking a loan on your loan. But remember, you still owe the money. Therefore, this strategy should be limited to financial emergencies or the reallocation of funds toward higher-rate liabilities.
You can pay off your loan sooner
Paying off your loan sooner will save you money. If you can afford to make larger principal payments due to a change in income, you can refinance to shorten the length of your loan. This gives interest less time to accumulate and, as a result, lowers the total cost of your loan.
In addition, the feeling of being debt-free is unlike any other. Sure, financial advisors will say that some debt is good to have. But there’s something psychological about seeing a zero on the balance sheet. The pros of paying off a loan go well beyond the numbers.
MORE: How to calculate total interest paid on a car loan
Cons of refinancing your car
Refinancing isn’t just a quick fix solution. If not handled properly, you could end up doing quite the opposite of saving money. So here are some of the cons to refinancing that you should keep on your radar.
You may pay more interest in the long run
As mentioned earlier, lengthening your car loan can reduce your monthly payments, but it also allows more interest to accumulate. Even if you can secure a lower interest rate during refinancing negotiation, you may still end up paying more in the long run.
For example: If you have a $15,000 loan with a 10% interest rate for 24 months, you will pay $1,612.17 in total interest. If you refinance that same $15,000 at a 7% interest rate over 48 months, you’ll pay $2,241.30. That’s roughly $600 more in the long run.
You may be subject to fees
Refinancing your vehicle isn’t free of charge. You technically don’t owe the lender anything, but you may be subject to various supplemental costs, like application or retitling fees.
You could go upside down on your loan
If you’ve ever seen Stranger Things, you know don’t want to go to The Upside Down—and the same is true of your auto loan. Being upside-down means that you currently owe more on the auto loan than the vehicle is worth.
Many folks will refinance to gain short-term benefits without considering the longer-term effects of depreciation. So if you choose to refinance, have a financial professional assist you with visualizing the big picture.
Is refinancing the right move for you?
If you’re reading this article, you’re already off on the right foot by doing your research. While we can’t answer the question for you, you should now have the tools to help make an educated decision.
Here’s a final checklist to help you along: weigh your pros and cons, quote multiple lenders, and define your financial goals.
How to quickly and easily refinance your car loan
When you think of refinancing your car loan, you probably picture loads of paperwork and hours out of your busy schedule, right? That’s how it used to be—and what people usually think of when it comes to their car insurance as well. But with
Jerry
, shopping for affordable car insurance
is faster and easier than ever! It only takes about 10 minutes to complete the process and you can do it entirely from your phone. And did we mention that Jerry customers lower their monthly payments by an average of $118 per month?
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Does refinancing hurt your credit score?
Refinancing will result in a slight dip in your credit score, initially. But the whole point of refinancing is to rebalance your payment strategy to match your current financial situation. So if you can execute it effectively, your credit score should respond positively in the long run.
How much does it cost to refinance a car loan?
There is no flat fee for refinancing your car with a new lender. However, there could be some potential costs. For example, you could be subject to processing fees or a negative return on your refinancing strategy if improperly executed.
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