Pros & Cons of Auto Refinancing

by Neil Kokemuller

Refinancing an auto loan is a way to save money on the total loan repayment, to reduce monthly payments and to preserve cash. However, certain situations make refinancing impractical or impossible. You also need to be leery of shady offers from lenders with bad intentions.

Save Money

A primary goal of a car loan refinance is to save money. When you refinance from a higher interest rate to a lower one, you can save hundreds or even thousands of dollars over the life of the loan. The greater the drop in interest, the more you save. The initial interest rate on a car loan depends on market rates and your credit qualifications. If overall interest rates decline and you improve your credit score, a refinance saves you a lot of money.

Reduce Payments and Preserve Cash

Whether you get a significant drop in interest rate or not, you can reduce your monthly payments and preserve cash flow with a refinance. If you are well into your existing loan repayment, spreading the remaining balance out with a longer refinance term lessens the monthly payment obligations. You also have a choice of making a larger down payment at the time of refinance, which reduces the balance owed and monthly payments. These factors, combined with an interest-rate reduction, greatly improve future cash flow.

Complications and Challenges

Several circumstances may impede or challenge your refinance options. If you owe more on your existing loan than the car is worth, it is difficult to get a lender to refinance because of the risks to the lender. Also, if you refinance soon after securing your initial loan, the upfront finance fees may not be cost-effective relative to the new refinance terms. If your credit score is poor or worse than it was at the time of the initial loan, you may not have access to rates and terms that justify a refinance.

Predatory Lenders

Predatory lenders also pose risks when you seek a new loan. These lenders prey on poor or vulnerable car owners who may make unwise choices out of desperation. They may conceal important information that could dissuade you from avoiding their products. Another common tactic is adding expensive insurance and fees into your loan contract without you knowing. Unusual prepayment rules are another tactic. Reviewing every item on the loan contract and asking questions about curious fees helps you avoid getting burned.

About the Author

Neil Kokemuller has been an active business, finance and education writer and content media website developer since 2007. He has been a college marketing professor since 2004. Kokemuller has additional professional experience in marketing, retail and small business. He holds a Master of Business Administration from Iowa State University.

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