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Refinance A Car Loan: What Are The Pros And Cons of Refinancing?

Finance | 03/03/2022 23:00
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There’s a lot to consider when it comes to refinance. Car loan refinancing can be especially confusing. When can you refinance a car loan? What is the best way to refinance a car loan? What are the pros and cons?

Well, if you have questions on your mind about refinancing, good news! Today, we're talking all about auto loan refinance and answering all of your most burning questions!

Here’s your guide to the pros and cons of an auto loan refinance.

What Are The Advantages Of Refinancing Your Car?

You can save money by lowering your interest rate

The main advantage of car refinance is simple: it can save you a lot of money. There are a few reasons why you might be able to score a lower car loan APR this time around:

  • Your credit score has improved. If your credit score has improved since you initially applied for financing, there’s a good chance you can get a much lower car loan APR. Your credit score could have improved for a number of reasons. Making consistent and full on time payments can impact your credit score positively, as can paying down outstanding debt. Your credit score is one of the biggest factors in determining what interest rate you are offered, so an increase in your score can lower your interest significantly.

  • The market rate has decreased. If the overall interest rate in the market has decreased, there's a good chance you may qualify for a lower car loan APR. Right now car loan APRs are incredibly low (although they are set to increase as the year goes on). In the past two years the average car financing rate has decreased over 1.3%, which can add up to a lot of savings if you refinance.

  • You got talked into a bad deal in the first place. Dealerships are notorious for adding on high markups to financing plans. Simply refinancing to an accredited lender may reduce your interest rate, even if your credit score and income have remained the same.

You can reduce your monthly payments

Refinancing your car loan gives you the chance to reduce your monthly car loan payments. This can happen either by lowering your APR (which naturally leads to lower payments) or by changing your repayment period. If you need some extra room in your monthly budget, lengthening your repayment period will allow you to spread out your payments over a longer period of time. This will reduce your monthly payments.

You can add or remove a cosigner

If you need to add or remove a cosigner for your loan, you will need to refinance your car loan. It is not possible to simply add or remove a cosigner, it requires you to take out a new loan completely. This is because interest rates and loan terms are highly dependent on the applicant. So if you want to add or remove a cosigner, refinancing your car loan is the best option.

What Are The Disadvantages If I Refinance My Car?

Your existing loan may have prepayment penalties

If your existing car loan has prepayment penalties, the penalties may outweigh the savings of a refinance. Car loan paperwork should have the fees listed out. If it’s unclear, call your agent to confirm.

Reducing your monthly payments may mean you pay more overall

If you are refinancing your car loan to make your car loan payments more manageable, you may end up spending more money overall. Spreading out your payments over a longer period of time will reduce them, but it also means that you will be paying interest over a longer period of time. But if you need the extra breathing room in your monthly budget, it might still be worth it.

It may temporarily drop your credit score

When you refinance your car loan, you are paying off one loan with another loan. So you are closing out one account and starting a new one. This will affect two areas of your credit score: your credit history length and your new credit. Your credit history length will be reduced since you are closing one account out, and your new credit will show one new account and a hard inquiry into your credit. 

Neither of these account for a large portion of your credit score, but you should be aware of it. Especially if you are relying on a good credit score for another reason, such as a mortgage or another loan application. 

How To Decide If An Auto Refinance is Right For You

If you are wondering if an auto refinance is right for you, ask yourself the following questions:

Do you qualify?

First off, are you even eligible for auto refinancing? If your car is more than ten years old or has more than 100,000 miles on it, your vehicle might not even qualify for refinancing.

How much time has passed since your initial financing?

There is no minimum amount of time you need to wait to refinance your car loan, but experts agree that waiting 6-12 months will give you the best shot at refinancing. This will give your credit score enough time to bounce back after the hard inquiry and will give you the chance to make consistent, on time, full payments. This will show lenders that you are a good candidate and will help ensure that you get a better interest rate

How much time is left on your loan?

If there’s less than a year left on your car loan, it’s probably not worth it to refinance. First off, lenders will probably not find it to be worthwhile, so you may have a hard time getting approved. Second, it won’t be as worthwhile to you. Car loans are front loaded and amortized, meaning that in the beginning of the loan you are paying more towards the interest, and towards the end of the loan you are paying more towards principal. So the closer you are to the end of your loan, the less you are paying in interest (and thus the less auto refinance will save you).

There are a lot of advantages to refinancing your auto loan, but it will depend on your situation whether or not the timing is right.

If refinancing sounds like a good option for you, consider refinancing your car loan with Auto Approve. We specialize in auto refinance and have relationships with lenders all across the country. This means we can save you a lot of money and we can make the refinancing process super simple. And with a 96% would recommend rating on LendingTree and an A + with the Better Business Bureau, you know you are in good hands. So don’t wait any longer to start saving money!


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*APR and Fees Disclosure: Auto Approve works to find you the best Annual Percentage Rate (APR), which is based on factors like your credit history, vehicle and desired payment terms. Fees to complete your loan refinance vary by state and lender; they generally include admin fees, doc fees, DMV and title. Advertised 6.24% APR based on: 2019 model year or newer vehicle, 730 minimum FICO credit score, and loan term up to 72 months. All loans subject to credit and lender approval.
Auto Approve has an A+ rating with the BBB and is located at 2860 Vicksburg Lane North Plymouth, MN 55447. Auto Approve works to find its customers the best terms and APR, which are based on factors like credit history, vehicle, and desired payment terms. Loan amounts, costs, and fees vary by state and lender; they generally include admin fees, doc fees, DMV, and title fees, depending on the lender and period of repayment. There is no fee to obtain a quote and all refinancing-related costs are included in the amount financed so there are no out-of-pocket costs! For more information, please go to AutoApprove.com.