Refinancing your car loan can be risky if you aren't aware of the pros and cons. A slight offhand mistake can result in you losing hundreds of dollars. Indeed, you wouldn't want something like that happening to you?

This is precisely why you need to know the ins and outs of the matter. A closer look at the pros and cons of refinancing your car will determine your next move. To do so, follow the guide I'm about to show you.

Pros and Cons of Refinancing Your Car Loan

Here are the advantages of refinancing your car loan and the disadvantages of it:

What does refinancing a car loan mean?

In a nutshell, refinancing a car loan means paying off your old loan with a new one. However, whether it would be beneficial for you or not depends on several factors. Credit score and payment history can have a massive impact on the matter.

Now that we know what refinancing a car loan is, let's dive into the pros and cons.

Pros of Refinancing Your Car Loan

It's always a good idea to start with the positive aspects of a thing. So, let's examine the pros of refinancing your car loan. 

You can lower your monthly payment.

A situation might arise where you need to cut your monthly expenses to pay for an unexpected occurrence. Refinancing your car loan to extend the duration of your loan in such a case might be a good idea because extending the course will help you lower your monthly expenses and give you that extra cash you need.

For instance, if you have one more year left on your current loan, you can extend it to three years. The added years will significantly reduce the amount you must pay each month.

You can reduce the interest rate.

Refinancing your car loan will help reduce the interest rate if your credit has improved. This is all the truer if you've made timely payments for the last six to twelve months. Even if you can lower the interest rate by 1% or more, you'll be able you get advantages of hundreds throughout the loan.

You can pay off the loan earlier with a lower interest rate. Or, if you like, you can cut down your monthly payment with the same duration. However you see it, you'll benefit a bunch of money.

You can pay off your loan sooner.

You can consider refinancing your car loan to a shorter loan term if your income has since increased. The interest rate will decrease with a shorter loan term. This way, you'll pay off the loan earlier while saving money.

This is more beneficial than paying extra on your current plan. Refinancing will help you deliver straight to the principal, which means more money on your hands.

You can borrow some extra cash.

If you need extra cash, refinancing your car loan could be a way to go about it. However, it can only be so if you owe less than your car is worth. In such a case, you can get some extra cash.

For instance, imagine your car is worth $10000, and you've already paid $5000. If you refinance your car for $7500, you'll still have 2500 dollars left. Once the new loan is used to pay off your previous loan, you can spend the $2500 for whatever purpose.

Cons of Refinancing Your Car Loan

Now that we've gone through the pros, let's look at the cons you'd need to look out for.

You may have to pay more in total.

You might refinance your car loan to a longer term to reduce your monthly payment. Although this is handy when you're struggling to pay your bills, it can cost you additional interest. The other months of interest increase the overall amount you must pay throughout the loan.

This is the case even with a reduced rate of interest.

You may have to pay fees.

Depending on your state, you might have to pay fees to re-register your car. Though uncommon transfer fees, application fees, and prepayment penalties aren't entirely unheard of. It would be perfect to ask your current lender what costs you must pay.

Your credit might drop temporarily.

Refinancing your car loan can cause a temporary drop in your credit score. However, such a risk is inevitable since you'll replace an older loan with a new one, not to mention the fact that a hard inquiry of your credit will also be needed before the refinancing is completed.

Now that the pros and cons are out, let’s look at some handy tips on refinancing your car loan.

Tips on Refinancing Your Car Loan

1. Do the math. Whether you should refinance your car loan depends on your situation and what you want. It would be right to cut monthly payments or lower the interest rate. You'll need a sound plan so everything goes smoothly the whichever route you go.

2. Use a refinance calculator to compare loan terms and refinance possibilities. A refinance calculator will show you how much refinancing will benefit or cost you.

3. Go for the shortest loan term with the lowest interest rate if you can afford it. This way, you'll get the most out of it.

FAQ

Will refinancing my car loan lower my credit score?

Yes, refinancing your car loan might initially hurt your credit score. However, with timely payments, you can soon regain your score.

When should I refinance my car loan?

It would be suitable if you had at least waited six to twelve months before refinancing your car loan.

Will refinancing my car loan make it start over?

Yes, refinancing your car loan does make it start over. A new loan with new terms will replace your previous loan.

Final Thoughts

Refinancing your car loan is a good idea on a whim. However, it's not something you'd want to rush into. It would be perfect if you only went for it after much deliberation and careful planning.

The entire process is a considerable commitment and calls for strategy-making. So take your time to get the particulars to a tee. Then you're sure to get a profit out of it.