Auto Refinancing Pros and Cons

There are a number of different reasons someone might pursue auto refinancing. Experts say it's important to assess your situation to determine if auto refinancing is a good idea.

Benefits of Auto Refinancing

• Lower monthly payments. Particularly in today's economy with interest rates hovering near all-time lows, it's possible for many people to refinance car loans and secured a lower interest rate. For example, a car owner could save nearly $50 a month be refinancing a 3-year car loan for $20,000 from 15 percent to 10 percent. Increasing the length of the loan can add additional savings.
• Reduce the loan term. If the interest rate has dropped since got the loan for your new car, you may want to consider refinancing as a way of shortening the loan term without significantly to the monthly payment. A $20,000 loan for 4 years at 15 percent is $557 a month. Switching to 3 years at 10 percent only adds just under $90 a month to the monthly note.
• Cash out for other purposes. If you have run into money troubles some time after financing a new vehicle, you can use auto refinancing as a way to get cash out of the transaction for other purposes. Chances are you'll need to significantly extend the length of the auto loan, which is not a recommended move by car refinancing experts. However, the unexpected bill or other emergency may be more important than extending the life of the car loan.
• Improve your credit score. Credit experts say that auto refinancing involves the new finance company paying off the old loan and then issuing a new one. Your credit report will show that you have paid off a car loan, which in many instances will improve your credit score.

Issues with Auto Refinancing

• Bad credit. If your credit score has decreased since the original car financing, then you are likely to get a higher interest rate when you inquire about auto refinancing. That means your chances of saving money in the transaction are greatly diminished.
• Excessive mileage on current vehicle. An auto refinancing may cause a car owner to hold on to a vehicle much longer than planned. That means additional mileage and wear and tear on your vehicle before the loan is paid off and you decide to purchase a new vehicle. In addition, that significantly lowers the amount of money your current vehicle is worth as a trade-in for a new car.
• Savings vs. extended loan term. If you decide to extend the length of your car loan by refinancing, it's important to make sure the amount of the monthly savings is enough to cover the additional payments added to the loan. If you are only able to save a few dollars a month by refinancing and extending the loan term by 12 months, it's easy to see the additional cost of the loan far outweighs the potential savings.