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Pros and cons of refinancing an auto loan

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    Most decisions in life come with pros and cons and refinancing an auto loan is no different. If you’re looking to potentially reduce your monthly payments or shorten your repayment term at a more favorable rate, refinancing your car loan may be an option. However, refinancing is not without its risks.

    Although Chase doesn’t offer refinancing for auto loans, we’ll cover some factors you may want to keep in mind to see if it’s the right choice for you.

    What does it mean to refinance a car?

    Having a general understanding of what refinancing a car means will help inform any decisions you may make, whether now or in the future.

    In simple terms, refinancing your car loan involves swapping out your current auto loan for a new one. While processes may vary, typical steps involved when refinancing a car include:

    • Determining whether refinancing your loan is the right option for you: There are many factors that go into assessing whether refinancing is potentially to your advantage. We’ll go through some of these considerations below.
    • Researching car refinancing loans: Your research will help you determine the kinds of refinance loans in the marketplace, which of these you might be eligible for and how these options might serve you better than the auto loan you currently have.
    • Applying for refinancing: Once you've decided on a lender and are ready to apply, you’ll typically need to gather various documents for the lender. This may include your driver's license, your certificate of car insurance and proof of income. Your original loan contract and information about your vehicle, such as your vehicle identification number (VIN), may also be required, among other items. Your lender will inform you exactly what’s needed.
    • Paying off your current loan: While this part may sound complicated, your new lender will often communicate directly with your current lender to take care of the transition.

    While the process of refinancing a car is typically straightforward, that doesn’t necessarily mean refinancing is right for you. Let’s look at some factors you may want to consider given your individual circumstances.

    Pros of refinancing an auto loan

    There are various reasons why you might consider a refinance. Potential pros of refinancing an auto loan include:

    Benefiting from an improved credit score

    Your credit score is typically an important factor when lenders assess your loan application. It’s updated by the credit reporting agencies on a regular basis, which means it’s possible your credit score is stronger now than at the time you took out the original loan. In this scenario, you may be eligible for a lower interest rate, potentially contributing to an improved APR and a reduced overall cost of borrowing.

    Extending your repayment term

    Another potential benefit of refinancing is the chance to modify your car repayment term. Through refinancing, you may request to extend the length of the term, which typically lowers your monthly payment. However, in this case, you also tend to pay more in interest across the new loan’s longer duration, but you always have the option to make extra payments when your budget allows.

    Shortening your repayment term

    Alternatively, you may be interested in paying down your car loan earlier than originally scheduled. Perhaps your income has grown since the time you took out the loan, you’ve come into some extra cash or current interest rates are down. Rather than simply putting additional money toward your current payment, you may look at refinancing your car loan for a shorter term. However, be sure to check your current APR. If your APR isn’t lower, you’ll do just as well to make larger monthly payments on your current loan.

    Taking advantage of reduced interest rates

    Interest rates may change over time. Perhaps average market rates have fallen since you originally financed your car. If that’s the case, you may find a better annual percentage rate (APR) for your car loan with a little shopping around.

    Lowering your monthly payment

    A lower interest rate and APR may have the potential to reduce your monthly car payment, which is a major reason why people consider refinancing an auto loan in the first place. Perhaps you have new expenses you need to manage alongside your car payment, or you simply want to claw back some disposable cash each month — a lower rate can mean a lower payment that frees your income for other purposes.

    Cons of refinancing an auto loan

    As mentioned, refinancing your car loan carries with it some potential disadvantages. Cons of refinancing an auto loan may include:

    Incurring extra interest

    If interest rates have increased or your credit score has fallen since you took out your original loan, refinancing your car loan may mean you’ll wind up paying more interest.

    Absorbing additional fees

    A refinance may cause you to incur extra costs, such as origination, processing and application fees. In addition, paying off your existing loan early may trigger a prepayment penalty. It’s important to check your original loan agreement before refinancing an auto loan.

    Lengthening your repayment term

    While increasing your term length by refinancing may seem attractive at first, extending your repayment period may considerably increase the amount of total interest you pay.

    When should you refinance your car?

    Determining whether to refinance your auto loan is a personal decision based on your individual circumstances. Note that refinancing may come with other fees and conditions attached that bear careful examination before committing to an agreement. While Chase doesn't offer car refinancing, a few scenarios in which refinancing might be worth considering include:

    • Your credit score has improved since you took out your loan or you qualify for better rates in other ways.
    • You’re finding your current monthly payments difficult to make and would like to reduce the monthly amount by spreading the remaining balance over a longer repayment term.
    • Your disposable income has increased, current rates have gone down, and you’re interested in paying down your car loan in a shorter period on potentially more favorable terms.
    • You’ve shopped around for refinancing offers with multiple lenders and found a better deal than your current loan.

    Is refinancing a car worth it?

    Of course there may be some situations where refinancing probably still doesn’t make sense. Maybe you’re close to paying off your loan or you’ve only just purchased the car on terms that can’t be improved in the current market. Or perhaps the benefits of refinancing appear relatively minor, and the application is possibly not worth your time and effort.

    In summary

    While refinancing your car loan may make sense in certain situations and possibly lead to lower monthly payments or more favorable terms in other ways, there are potential drawbacks to keep in mind. Whichever path you take, the most important thing is taking the time and consideration to ensure that your actions are ultimately right for you.

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