by Emily Hechler 
Are you paying off your car loan? Did you make this purchase while still paying off another auto loan or other debt? Your monthly bills have increased and your checking and savings account have taken some hits. There’s no need to fret. You can reevaluate your situation with a practical money-saving solution, refinancing an auto loan.
What is Refinancing?
Before applying to refinance an auto loan, you need to understand what actually happens when you refinance. When you signed that contract a couple of years ago, you committed to paying back the remaining principle of the car’s total (minus the down payment) plus interest on the principle. When you refinance an auto loan, take out a new loan that pays off the first loan, leaving you with a new loan to pay off. Your loan term and interest rate can change when you refinance, potentially making it a more affordable solution.
Here are some reasons why you might want to refinance your auto loan:
- Better credit
- Saving money over time
- Consolidating your loans
- Paying off a loan early
- Lowering your monthly payments
The Pros of Refinancing
Let’s look at the pros and cons of refinancing your car loan. Let’s start with the pros.
Better Interest Rate
If you paid your minimum monthly payments on time on your first car loan, you have helped raise your credit score. If your credit score has improved since you took out your first car loan, you might qualify to receive a better interest rate. This will result in lower monthly payment.
Save Money Over Time
When you contact your lender to discuss your current rates and the balance left on your loan, you might discover that you can manage paying off the remaining balance now. While this could cost you a large sum now, you are saving all the money that you didn’t have to pay toward the interest. This saves you money in the long run.
Shortening Your Term
If you are able to throw a little extra toward your first loan payment, you might be able to shorten the length of your term. You can go from having four years left on your loan to having two years left on your loan by paying more each month. This will save you on interest in the long run. Plus, this allows you to remove the lien from your car title sooner too.
Consolidate Two Auto Loans
Chances are, if you financed your cars through the dealership where you made your purchases, you are paying two different institutions for your loans. You can consolidate your two loans into one, easy payment. Plus, you can set up automatic payments with Alltru’s online banking to make the process even easier.
The Cons of Refinancing
If you apply to refinance your car loan, your credit score will take a small hit. Make sure you can manage the dip before applying and consider these other cons of refinancing your car loan too.
Pay More Toward Interest
You might decide to refinance your loan because you need to decrease your monthly payment in order to pay for other expenses. Doing this means you’ll likely increase the length of your loan. Over time, this results in paying more toward interest and not the principle of the loan.
Pay Extra Fees
Some lenders require you to pay extra fees to refinance your car loan or to pay it off early. At Alltru, we charge $0 in fees to refinance your car. Rest assured that no hidden fees will come when you make the switch.
Potentially Upside-Down
If you refinance your loan and increase your term, you are giving your car more time to depreciate while still paying off the loan. Once your car value dips below what you still owe, you’re upside down. If you decide at this point to try to sell your car, you still owe the difference to the lender.
Should I Refinance My Auto Loan?
When I bought my first car, I had a 60-month term and had my dad cosign since I had little credit history. Even though I made all the payments, having his name on my loan helped me get a low interest rate. When I got married, my dad wanted his name taken off my car loan. I talked to my current lender about refinancing under just my name while keeping just my name on the loan. This was going to triple my interest rate! Since I only had about a year left on the loan, I decided to pay off the remaining balance.
When you consider refinancing an auto loan, it’s important to consider your entire financial situation. Do you need to save money now or in the long run? Whatever you decide, Alltru is here to give you accessible financial tools and products to set you up for success.
