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Why Auto Loan Refinancing Does Not Always Make Sense

Lower monthly payments are often enticing especially if you are antsy to get rid of your car loan. But taking that offer along with a long loan term may not really make financial sense. More people are taking car loans that are 86- or 96-month long. It has become the norm after the Great Recession. There have also been more inquiries this year about auto loan refinancing according to

Auto loan refinancing is often seen the best way to get out of a high-interest car loan faster and save more money in the process. In other words, it is the smartest move to make for many heavy-laden borrowers. But is it? Consider these.

Lower Interest Rate But Bigger Total Amount Paid

Refinancing your car loan is supposed to allow you to repay your loan with a lower interest rate. That means you shouldn’t proceed with the idea unless you are sure you will get a lower APR or annual percentage rate in the new loan. Lenders are competitive when it comes to their auto loan refinancing rates. Check them out and make some comparisons before applying for refinancing.

In addition, it is not wise to refinance if you would repay the new loan in a longer term. You will be paying more over time if you choose to extend your repayment period. Lower monthly payments do not justify the idea of spending more months repaying a loan.

Depreciating Asset

Unlike real estate, your car loses value over time. This is one reason why opting for long loan terms may not be a wise decision. Think about this: You are just on the fourth year of your seven-year loan and your car’s value has significantly dropped already. Now your balance is greater than your car’s value. This is called being underwater, and it’s a terrible situation to be.

Debt advisers suggest avoiding auto loan refinance if you only have two years left until the agreed payoff time. In that case, it is better to finish your loan than take out a new one where you might extend your repayment time.


Another purpose of refinancing an auto loan is saving more money. Before you actually refinance, find out whether you will be able to save. Believe it or not, a lot of borrowers had already completed their loans before they realized they weren’t able to keep some money at all from refinancing.

One of the biggest hindrances is the prepayment penalty which some lenders charge for paying off the loan sooner than the agreed schedule. The fee could be very expensive that dealing with it and proceeding with refinancing is pointless.

Online auto loan calculators like the ones available in can help you estimate the savings you can keep from refinancing your car loan. Do some math first before you bank on the idea of auto loan refinance.

Are You Eligible?

Among the factors to consider before refinancing an auto loan is whether you are eligible. Lenders have their own eligibility requirements. Most of this restrictions concern the age of your vehicle, your outstanding balance with your current lender, the current loan term, and the types of vehicles that can be refinanced. When you shop for the best refinance rate, do not forget to ask about the requirements.

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