Personal Finance Basics

Pros & cons of refinancing your car loan

June 26th, 2023 Jun 26, 2023 • Read time: 5 min


When most people buy a car, they take out an auto loan to pay for it. And when taking out a loan, there is an interest rate that is charged to the loan amount each month. So, it’s smart to look for the best interest rate you can get. But interest rates change over time. What was considered a good interest rate when you bought your car maybe isn’t so good right now. This is why many people choose to refinance their car loan–to get a lower interest rate, save money each month, and pay off the loan sooner. However, there are some cons along with those pros when it comes to refinancing your auto loan. Let’s take a look at both.

Pros of refinancing your car loan

Less interest

As we mentioned, one of the main reasons borrowers refinance their car loans is to get a lower interest rate. Interest rates change from time to time, and sometimes the chance to get a much lower interest rate is too good to pass up. It’s not recommended that borrowers refinance their loans multiple times though, since it can hurt their credit score. It is smart to check lenders’ and credit unions’ interest rates every so often throughout the loan term to see if there are lower interest rates that can be taken advantage of. One thing to remember–borrowers will likely only qualify for these lower rates if their monthly payments are made on time.

Lower monthly payment

If you are able to refinance your auto loan for a lower interest rate, your monthly payments will become more affordable since you’re paying less interest overall. When refinancing, you can also extend the term of your loan. By stretching out the loan term, your monthly payment will be even less. One thing to keep in mind–with a longer loan term, you may wind up paying more in interest over time, even with a lower interest rate.

Pay off your loan earlier

Most auto loans are three to five years. During that time, your financial situation may improve. If that’s the case, you could refinance your car loan for a shorter period of time–and a lower interest rate–and pay off the loan much more quickly. It is true that you could just pay extra each month on your existing loan without refinancing it. But by refinancing, you’ll likely save more money since you may also be able to get a lower interest rate.. 

Cons of refinancing your car loan


It’s always smart to read the fine print or discuss with the lender or your credit union any possible fees that you may be charged if you refinance your auto loan. Application and origination fees are the most common, so look out for those and compare lenders. Some lenders and credit unions may also charge you a “prepayment penalty” for paying off your loan earlier than expected. Lenders sometimes charge this fee to recover what they would lose in interest payments if you were to pay the loan off early. These fees can add up fast, so make sure you know what you’re paying for when you refinance your car loan.

Interest amount could rise

Yes, you may be able to refinance your auto loan for a lower interest rate. However, if you refinance for a longer loan term, the actual interest amount you pay on the loan might be more because you’re now paying interest for more months. In other words, the interest rate itself may be lower, but you could still wind up paying more money overall because of the extra months added onto the loan. If you refinance at a lower interest rate, try to keep the loan terms the same as or shorter than your current loan. That way you can get a better interest rate without adding extra monthly payments.

Potential of being upside-down on the loan

When you owe more on your car loan than the vehicle is worth, the auto loan is considered to be “upside-down.” For example, say your vehicle is worth $15,000 but your loan balance is $18,000. That means the loan is upside-down. Before you decide to refinance your car loan, make sure that you don’t owe more than what the car is actually worth. 

When should I think about refinancing my car?

Now you have the pros and cons of refinancing your car loan. If you’ve thought about those and decided to refinance your auto loan, the next step is to figure out when to do it. There are definitely certain things to consider when it comes to deciding when to refinance your auto loan.

Good credit score 

If you’ve been making your monthly payments on time–not only on your car loan but other loans and debts as well–there’s a good chance your credit score has improved since first taking out your auto loan. If so, you’re probably in a better position to refinance for a lower interest rate. Before doing so, just make sure your credit score is in a better place and research lender interest rates to find the refinancing option that works best for you.

Qualify for a better interest rate

Interest rates go up and down based on many different factors. You may have taken out your car loan when interest rates were high. But those interest rates might be much lower now. When the interest rates drop, that’s a good time to consider refinancing your auto loan. A lower interest rate can save you money on your loan payments each month.

Refinance early in the loan term

It doesn’t make much sense to refinance a car loan if most of it is already paid off. The savings on interest probably will not be enough to make refinancing worth the time and effort. That’s why you should look into refinancing early in the loan. This way, you can take full advantage of more potential savings on interest for the rest of the loan term.

Is refinancing your car loan right for you?

Refinancing your car loan can be very helpful financially in the right situation. Especially if you’re still early in the car loan, if interest rates are now much lower, and if your credit score has improved. While Sun Loan doesn’t offer loans specifically for buying a vehicle, we do offer personal loans that can help pay for auto repairs. Click here to view our personal installment loan options. You can also stop by your local branch today to talk to a loan specialist, or give us a call at (800) SUN-LOAN!

Author – Holly Munoz

Holly Munoz serves as Regional Vice President at Brundage Management, the management holding company that operates Sun Loan and related subsidiaries. Holly has over 15 years of experience in the loan ... Read more »

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