Should I Refinance My Car Loan? Pros & Cons Of Refinancing (2024)

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Pros & Cons of Car Refinancing

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How Does Auto Loan Refinancing Work?

The good news is that refinancing an auto loan works similarly to refinancing other types of loans. Essentially, you’ll be using a new loan to pay off your existing one.

That said, it’s important to look for a new loan from a reliable lender that makes refinancing beneficial to your financial situation. Indeed, you’ll want to make sure the new loan has a better interest rate, lower monthly payments, or a more suitable term length, depending on your needs.

For a more detailed explanation, check out our blog on How to refinance a car with CU SoCal.

When Does Refinancing Your Car Loan Make Sense?

For those with the question of “should I refinance my car loan?” you have to understand when it makes sense to do so. It might seem like a quick way to get better terms, and it is in many cases, but it isn’t always the right decision. To make sure it’s the right choice for your financial situation, you need to consider a few things, like your credit score and whether the new loan has better terms. Below are a few things to consider.

Your Credit Score Has Improved

As you probably found out when you initially took out your auto loan, your credit score has a pretty significant impact on the terms that you received. If your score was low, you might have ended up with a high interest rate.

However, so long as you’ve made your monthly payments on time, your credit score has likely improved.

In that case, refinancing makes more sense than sticking with your existing loan. A better credit score means lower interest and better overall terms, so it’s a great time to make a change and start the refinancing process.

If your score isn’t quite where you’d like it to be just yet, check out the CU SoCal credit builder loan, a loan designed specifically to boost your credit score.

You Can Get a Better Deal

In short, you shouldn’t trade in your existing auto loan for one with worse terms. Refinancing an auto loan only makes sense if you can get a better deal overall, so pay attention to new interest rates and term length. Your refinancing should make your life easier, not harder.

You Have an Emergency

When an emergency occurs, refinancing your auto loan may help you gain access to cash.

Known as “cash-out refinancing”, this strategy involves refinancing an amount that’s more than what you owe on the car.

The difference in the loan amount versus what you owe can then be used to cover whatever financial emergency you’re dealing with. Be cautious, though – you don’t want to end up owing more money on a loan than your car is worth.

Advantages of Refinancing Your Car Loan

If you’ve decided that refinancing your car loan is right for you, there are a ton of advantages that you have to look forward to: from reducing your interest rate, to improving your cash flow, to making debt payments more straightforward, there are so many ways that refinancing can help you out.

Whether you’re looking for short-term help or long-term financial advantages, refinancing your car loan may just be the right choice for you. Here are the primary benefits of refinancing a car loan.

Reduce Your Interest Rate

We mentioned that refinancing an auto loan makes sense if your credit score has improved. When you have a better credit score, you’ll most likely see better terms on the type of loan you’re looking for, especially when it comes to interest.

Once your score improves after making successful loan payments, you can apply to refinance with a loan that has a lower interest rate. This means you’ll be able to pay off your loan much faster than before and potentially have lower monthly payments.

Lower Your Monthly Payment

If your financial situation has changed, you might find that making your monthly payment has become too difficult to manage.

A new baby, an emergency medical procedure, or unexpected home repairs might impact your ability to make the installments, and lowering your monthly payments can help tremendously.

You can do this by getting a new loan with a longer term. That way, you have more time to pay off the same amount, freeing up more cash each month for other expenditures.

Improve Your Cash Flow

Refinancing your car could give you access to immediate cash flow in certain circ*mstances. For example, if you need instant cash for an emergency payment, but it’s all tied up in your current auto loan, you could refinance your vehicle for more than you owe on your existing loan.

If you owe $4000 on the loan, for instance, but you need money now to repair a leaky roof, you can refinance for $5000. That’s more than your current loan, which frees up $1000 to use for your home repair.

Consolidate Debt

If you have car loans for more than one vehicle, refinancing can be a great way to consolidate that debt. By taking out a new loan that covers the amount of all of your current auto loans, you’ll be able to streamline your payments, which makes loan management much more manageable.

Instead of remembering to pay several loan payments each month for each loan, you will only have to make a single payment. This frees up more time and attention for other important things in your life.

Disadvantages of Refinancing Your Car Loan

Even if you decide that refinancing your car loan is the right choice for you, there are still a few things you need to be aware of. Changing up your loan could bring about unexpected issues that are hard to deal with financially, so it’s best to be mindful of what road bumps there might be coming up.

So, just what are the disadvantages of refinancing a car loan? We have them all right here.

Refinancing Fees

Signing up for any loan often comes with a few fees, and refinancing is no different. Before you start the refinancing process, you’ll need to ask yourself if refinancing a car is worth it with all of these associated costs. These could include lender fees, title fees, closing fees, and penalties for closing your original loan early. By the way, CU SoCal does not charge fees to refinance a car!

You Could End Up Paying More Interest

Depending on the reason you are refinancing in the first place, you could actually pay higher interest costs than what you have on your current loan. For example, if you need more time to pay back the loan and refinance for a longer term, you’ll end up paying more in interest – even if the rate is lower. And don’t forget – the value of a vehicle depreciates relatively quickly, so a longer term could mean you’re paying way more than the car is worth towards the end of the loan.

Longer Term

As mentioned above, a longer term means that you’ll end up paying more for your car than you would have with the original loan. If you factor in the depreciation, your new loan can become excessively costly. Additionally, the older your car gets, the more likely it is that you’ll be spending money on repairs, another added cost to an extended term.

Is Car Refinancing Right For You?

Refinancing an auto loan may sound like the best way to free up cash or lower your monthly payments, but before you make a decision, you should weigh up the pros and cons of refinancing a car. As you consider your current credit score and monthly payment abilities, don’t forget to think about the added costs in terms of fees as well. When in doubt, a consultation with financial professionals could do wonders to help you get the best refinancing deal for your needs and situation.

CU SoCal Auto Loans

Whether you’re looking for a better interest rate, lower fees, or a more suitable loan term, we have you covered with CU SoCal auto loans. For over 60 years, we’ve been making it possible for our Members to get behind the wheel and on the road thanks to our competitive rates, quick preapprovals, and financing up to 120%. Getting the right auto loan or car refinancing is within your grasp with the help of our knowledgeable professionals.

Apply For A CU SoCal Auto Loan Today!

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