Sometimes, a year or more after you buy and finance the new car of your dreams, things can change. Perhaps you realize that that the payments are a little high, and you’re having trouble fitting them into your budget every month. Or perhaps you’ve just watched interest rates continue to fall month after month.
Whichever reason fits you best, refinancing your auto loan may be the way to go. So what *is* refinancing, exactly? Well, it’s exactly what it sounds like. Let’s say you signed up for a 60 month loan on your new car, and you’re 24 months into that loan. That means you have 36 months left, right? When you refinance, you take the balance of your current loan, and finance it for a longer period - maybe 48 months. That will bring down your monthly payment, hopefully to a more reasonable amount that you’re more comfortable with.
Are there any downsides to refinancing an auto loan?
Absolutely. For one, your original 60 month loan has now turned into a 72 month loan - the 24 months that you have already paid, and the 48 months that you refinanced for. So instead of paying off your car in 5 years, you’ll pay it off in six. Also, unless your interest rate drops by a solid amount, you’ll end up paying more in interest over the course of the loan.
Think before you refinance
Take a few minutes to think before you refinance your auto loan. If interest rates are dropping, it may make sense. You can even refinance for the same number of months that were left on your original loan. In that case, your payments drop due to the lower interest rate, you payoff the car in the same amount of time, and you save on interest charges. But if you aren’t so luck to be in such a great situation, you really need to think about whether refinancing is right for you. As a general rule, don’t refinance unless you plan on keeping the car through the entire length of the refinanced loan. Smaller payments and extended term usually mean negative equity right now - something that you want to avoid.