According to the State Of The Automotive Finance Msarket by Experian, the average monthly payment for a new car was $554 in Q1 2019, while the average payment for a used car was $391. The average loan for a new car was $32,187, while the average loan for a used car was $20,137. The average loan term for new cars was over 68 months, and for used cars it was almost 65 months.
You don’t like to owe money on your vehicle, but borrowing excessively (or for too long), can make you wish you had a other auto loan. It is particularly true if you have a loan with a high rate of interest because your credit was shaky when you applied.
It’s important to understand how refinancing an auto loan can help or hurt you . You’ll find all the information you need here.
Pro: You can secure a lower payment each month
Refinancing could result in a monthly payment that is more affordable, depending on the terms of your original loan. If you are struggling to pay your current monthly payment, or need more room in your budget, this can be a great option.
It may be easier to pay your bills and live comfortably if you have a smaller monthly payment. If you intend to keep your vehicle for a long time, you might not mind extending the repayment schedule to reduce your monthly payment.
Con: You can extend the repayment schedule
You may be happy to get a lower payment, but you will likely have to pay your car loan longer. This can have unintended consequences for your finances in the future.
It’s especially important if you are extending a loan for a car that is already several years old. If your older car breaks down or needs expensive repairs, you could find yourself stuck with payments. Even though you save money by refinancing, it could have a negative impact on your finances in the future.
Pro: You can get a lower interest rate
Refinancing could also provide you with a lower rate of interest. Refinancing could help you save hundreds, or even thousands of dollars over the course of the loan.
Imagine that your auto loan balance at the moment is $15,000, and you still have 48 months to go on your loan. Your APR is 19 percent. You would then pay $6,528 more in interest to repay your loan in four years.
You may qualify for a lower rate if your credit score improves. Refinancing to a 48-month auto loan at 9 percent APR could, for example reduce future interest costs from $2,917 to only $2,917, while also lowering the monthly payment.
Cons: You may pay more in interest over the term of your loan
Calculate your interest rates with an auto loan tool before you refinance. In the short-term, a lower rate of interest or lower monthly payment might seem like a good deal. However, if you extend your repayment period beyond the original term, it may cost you more in interest.
Profit from any equity you may have
You can tap into the equity in your vehicle by refinancing. You can use this to consolidate your debt and get a lower rate of interest.
Remember that refinancing, even at a lower interest rate, could result in more interest over time.
Cons: Refinancing costs money
Remember that there are usually fees associated with refinancing a car loan. The fees you pay will depend on your auto lender, but can include an application charge, an origination charge, and an auto lien-transfer fee.
Check that the initial loan you took out for your car does not have any prepayment fees that could come into play when you refinance.
Should you refinance a car loan?
Refinancing a car loan is purely based on your own judgment. You may save money by switching to a different loan, or have a lower payment each month. However, it is also possible that a new car loan will cost you higher interest and greater fees over time.
Compare auto refinancing rates from at least three lenders before moving forward. Comparing multiple lenders will increase your chances of getting a better deal on a new car loan.
