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Auto | Money
The Pros And Cons Of Refinancing A Car


Refinancing might be a good solution to lower your monthly car payment or to reduce the amount of interest you are paying over the long run. But, in some cases there are drawbacks, like lender fees or extra interest payments if you extend the term of your loan. So, before you refinance an auto loan, here are a few things worth considering.


Refinancing a car loan makes the most sense for folks with good credit scores and financial standing. This way, they can qualify for the most favorable terms and rates. Here are some benefits of refinancing an auto loan.

  • Lower Interest Rates: Refinancing your car loan can help you lower your auto loan's interest rate, saving you money over the term of the loan.
  • Reduced Monthly Payments: By refinancing, you can extend the loan term, resulting in lower monthly payments that might be a better fit for your budget.
  • Improved Cash Flow: Lower monthly payments can free up your cash flow, thereby enabling you to allocate funds towards other financial goals or expenses.
  • Access To Equity: If your car has gained value since you purchased it, refinancing can provide an opportunity to access the equity and use it for other purposes, such as home improvements or debt consolidation.
  • Simplified Debt Management: If you have multiple car loans, refinancing can consolidate them into a single loan, making it easier to manage your debts and potentially reducing administrative costs.  

AAA can help with a competitive auto loan rate for your refinance, lease buyout, new or used vehicle. Learn more.

While refinancing your car loan can help you save money, there are also some disadvantages, including:

  • Extended Loan Term: While a longer loan term can lower monthly payments, you'll be paying off the loan for a more extended period, potentially resulting in higher overall interest costs.
  • Prepayment Penalties: Some loans have prepayment penalties, which means you may incur additional fees if refinancing results in you paying off your current loan before the term has ended.
  • Potential Fees: Refinancing a car may involve upfront fees, including application fees, origination fees, or appraisal fees. Consider these costs when evaluating the financial benefits.
  • Impact on Credit Score: Applying for a new auto loan and closing the existing one can impact your credit score temporarily. It's essential to consider this potential impact before refinancing.
  • Negative Equity: If you owe more on your car than its current value, known as negative equity, refinancing may not be viable, as lenders typically require the loan-to-value ratio to be within certain ranges.

Remember, every situation is unique, and it's essential to carefully evaluate your specific circumstances and weigh the pros and cons before deciding to refinance your car. Then, if you determine that refinancing is the right choice, compare quotes from several lenders. This way, you can find the best terms and rates for you and your budget.