Is Refinancing a Car Worth It? Pros and Cons to Consider

Refinancing a car loan might feel like a financial chore, but it’s one that could potentially save you hundreds — or even thousands — of dollars. Whether you’re looking to lower monthly payments, reduce your interest rate, or get out of a tricky cosigner situation, refinancing can be a game-changer. But, it’s not without risks. 

So, is refinancing a car worth it for you? Below we’ll dive into the details, weigh the benefits and drawbacks, and explore alternatives to help you make the best decision.

Pros of refinancing a car loan

Auto loan refinancing offers several advantages, especially if your financial situation has improved or market conditions have shifted. The first step is to decide whether now is the right time to refinance your car loan, from there – consider these possible benefits.

Lower monthly payments

The most common reason people choose to refinance a car loan is to lower their monthly payments. This typically involves extending the loan term, which spreads out payments over a longer period. For example, if your current payment is $500, refinancing might drop it to $400, giving you an extra $100 each month for other expenses. Just keep in mind this may increase the total interest paid over the life of the loan.

Reduced interest rate

If interest rates have dropped or your credit score has improved, you could qualify for a lower rate by refinancing. For instance, going from a 7% interest rate to 4% could potentially save you thousands over time, depending on the amount of your loan. Use our loan calculator to estimate potential savings before deciding.

Shorter loan term option

Want to own your car faster? Refinancing into a shorter loan term might slightly increase your monthly payment but significantly reduce the interest paid overall. For example, moving from a 5-year loan to a 3-year loan can potentially help you pay off your car faster and save on long-term costs.

Improved cash flow

If you’re dealing with unexpected expenses (hey, they happen) or trying to balance your budget, refinancing can free up cash by lowering your monthly payment. This extra breathing room can be helpful for handling emergencies or tackling other financial goals.

Consolidate multiple loans

If you’re juggling multiple auto loans or other debts, refinancing can help streamline your payments. Consolidating loans can make it easier to keep track of due dates and ensure you don’t miss a payment, which could harm your credit score.

Ability to remove a cosigner

Refinancing allows you to remove a cosigner from your loan, which can be especially helpful if their financial situation has changed or they want to reduce their liability. This can simplify the loan by giving you full control over the debt.

Option to skip a payment during transition

Some lenders offer a payment grace period during refinancing, letting you skip a payment. While this isn’t always guaranteed, it can provide temporary relief if you’re in a financial pinch.

Cons of refinancing a car loan

While the benefits are appealing, there are potential downsides to refinancing an auto loan that you should consider:

Pay more interest long-term

Lowering your monthly payment often means extending your loan term, which can increase the total interest paid over time. For example, if you refinance from a 3-year loan to a 5-year loan, your monthly payment may drop, but you’ll likely pay more overall.

New loan fees and closing costs

Refinancing comes with costs, such as origination fees, title transfer fees, or prepayment penalties from your current lender. These fees can add up quickly, so it’s important to weigh them against the potential savings.

Credit score temporary dip from hard inquiry

When you apply to refinance, lenders perform a hard inquiry on your credit, which can temporarily lower your credit score. However, if you’re shopping around for rates within a short timeframe (typically under 45 days), credit scoring models typically treat these inquiries as one.

Risk of going underwater on loan

Extending your loan term through refinancing might put you “underwater,” meaning you owe more than your car is worth. This can be risky if you plan to sell or trade in the car before the loan is paid off.

May need to pay for new insurance

Some refinancing agreements require you to update your insurance coverage, which could result in higher premiums. Always check with your lender to understand their requirements before refinancing.

Alternatives to refinancing a car

If refinancing doesn’t seem like the right fit, there are other strategies to manage your auto loan:

• Sell the car and buy a cheaper one: Selling your current vehicle and purchasing a less expensive car can lower your financial burden.

• Request loan modification from current lender: Some lenders offer loan modification programs that adjust your terms without requiring a full refinance.

• Find a cosigner to help restructure the loan: Adding a cosigner with good credit could help you qualify for better terms.

• Trade in for a less expensive vehicle: Trading in your car for a cheaper model can lower your loan amount and monthly payment.

• Make extra payments when possible to reduce principal: Even small extra payments can seriously reduce the principal and interest owed.

Making the Right Call

Back to that original question …is refinancing a car worth it? It depends on your financial goals and current situation. If you’re looking to lower your payment, reduce your interest rate, or achieve better loan terms, refinancing can be a smart move. But it’s also important to consider the potential downsides, such as fees and long-term interest costs.

Before making a decision, compare offers from multiple lenders, calculate the potential savings, and consider alternatives like loan modification or trading in your car. And remember, MoneyLion offers tools and resources to help you make informed financial decisions.

FAQs

Is it good to refinance your car?

Refinancing your car can be beneficial if you’re eligible for a lower rate or better terms, but it’s not always the best choice. Evaluate your goals before deciding.

Will refinancing my car hurt my credit?

Refinancing may temporarily lower your credit score due to a hard inquiry, but this usually recovers quickly with timely payments.

How much does it cost to refinance a car?

Refinancing costs vary but can include origination fees, title transfer fees, and prepayment penalties.