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Pros & Cons Of Refinancing Your Car Loan

At times, it may be worthwhile to refinance a car loan. Doing so essentially replaces your current loan with a new one with possible benefits. However, there are also potential disadvantages to refinancing a car loan as well, but it ultimately depends on your situation.

Continue reading to learn about the pros and cons of refinancing a car. 

Potential Pros Of Refinancing Your Car Loan

Some of the benefits of refinancing an auto loan include the possibility for better interest rates, shorter terms, or lower monthly payments.

Getting a better interest rate

One of the most common reasons to refinance a car loan is to get a better interest rate. Market rates fluctuate up and down over time, presenting opportunities to save on interest as time progresses. 

Also, if you have been on time with all of your monthly payments, your credit score has likely improved. That can get you better rates from lenders since you present less risk to them.

Making car payments more manageable

Another advantage of refinancing is the potential to make car payments more manageable. If your finances are a bit tight right now, refinancing while market rates are down can get you slightly lower monthly payments by reducing interest.

Additionally, it is possible—though not always advised—to refinance to a longer loan term. Doing so can dramatically decrease your monthly payments, making them more manageable.

Paying off your car loan sooner

On the other hand, if you have more income—or less debt—than you did when you first bought your car, you can refinance to a shorter loan term to pay it off sooner. This offers a few advantages, one of which being that you won’t have to pay as much total interest over the life of the loan since it will have less time to accrue.

Another benefit of paying off your loan sooner is the fact that you can avoid getting upside down (or underwater) in the loan. Being upside down in a car loan means that you owe more on the loan than the car is worth. Given that vehicles depreciate over time, that can be a massive benefit, especially if you want to resell the vehicle later or if it gets totaled in an accident.

Paying off debts sooner also frees up income and lifts a burden off your shoulders.

Potential Cons Of Refinancing Your Car Loan

While refinancing can be beneficial when done under the right circumstances, there are some potential drawbacks involved. These are especially prevalent where an auto loan is refinanced at the wrong time.

More interest overall

In situations where you refinance to a longer loan term to get lower monthly payments, you may end up paying the price of more interest over the life of the loan. A longer loan term means interest has more time to accrue, so even if you get a lower annual percentage rate, adding 12 extra months could still end up outweighing the benefits long-term.

As such, it’s generally best to avoid refinancing to a longer car loan unless you have to.


Many lenders assess various fees on refinanced loans. Those fees may include early repayment penalties on the former loan, closing fees, transfer fees, and so on. It’s worth noting, however, that not every lender charges the same fees on their loans, so it’s often a good idea to look around for the best offer when it comes to refinancing a car loan.

If there are fees involved, it doesn’t necessarily mean that refinancing is a bad idea. The advantages of refinancing your car loan simply have to outweigh the costs.

Ending up underwater in the loan

One of the greatest risks of refinancing a car loan is the possibility of ending up underwater in the loan. By refinancing, you may extend the life of the loan (though that’s not always the case), which increases the chances that your car will depreciate below what you currently owe.

It’s for this reason that lenders may not even approve car loan refinancing if your vehicle is over a certain age. Different lenders have different policies, so again, shopping around may be a good idea.

When Is It Best To Refinance Your Car Loan?

Given the potential pros and cons of refinancing a car loan, the decision of whether to do so comes down to the timing and your current situation. Some scenarios in which refinancing might make sense include the following.

Your credit has improved

If your credit score has improved since taking out your loan, you may be able to save on interest—both short and long-term—by refinancing. In this case, it’s worth doing some calculations to see what your savings would be and if they warrant refinancing.

Interest rates have dropped

Additionally, if interest rates are at a low point, it presents a good opportunity for those who qualify for auto loan refinancing. Again, the potential for savings should be weighed against any costs and fees involved in refinancing.

It’s still early in the loan

The longer you’ve been paying off a car loan, the less the benefit will be if you refinance, and the higher the odds of going underwater. Often, lenders won’t even approve refinancing on an older car loan. Because of this, the earlier you refinance, the higher the potential benefits will be.

Weighing The Pros And Cons Of Refinancing A Car Loan 

If you feel like refinancing might be a good option for you at this time, the first step is to talk to your lender. A credit union can help you determine if auto loan refinancing is the right move and guide you through the process.

Learn More About Refinancing Your Car Loan