What are the disadvantages of refinancing a car? (2024)

What are the disadvantages of refinancing a car?

Refinancing also comes with the risk of higher interest rates. If your credit has dipped or interest rates have gone up, you may find interest rates higher than your current one. In the current market, steep interest rates aren't uncommon. Recent Fed rate hikes have driven interest rates up to record highs.

If the interest rate you qualify for today is significantly lower than your current loan rate, it may be a good time to refinance a car. If it's the same or higher, it's probably not the right time to refinance.

The downsides to auto loan refinancing can include paying lender fees and additional interest if you extend the loan term or cash out auto equity. You could also end up owing more than your car is worth.

Why do I owe more on my car after refinancing? Refinancing may result in owing more over the course of your auto loan if a change in the loan term length, removing a co-borrower, credit score, payment amount, or interest rate contributes to a higher overall cost.

If you have a poor credit history, you may be viewed as a higher risk to the lender. However, it may still be possible to refinance in these situations, especially if you're willing to provide a down payment. A down payment will lower the value of the loan, which should lower the lender's risk.

What is a good interest rate for a 72-month car loan? An interest rate under 5% is a great rate for a 72-month auto loan.

Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.

For example, when refinancing your mortgage, there will be closing costs to be paid as part of the process. If you opt to have the closing costs rolled into the new mortgage, you're augmenting the mortgage balance — the amount you owe — and thus diluting your equity — the amount you own.

If your new lender has different rules than your previous one, refinancing may increase or decrease what you pay for car insurance. Most lenders require comprehensive insurance coverage for any vehicle they finance.

Refinancing may lower your credit score a few points, but the impact to your credit score will only be temporary. Applying for a loan generates a hard inquiry. Refinancing may be worth it if rates have dropped since you took out your loan.

Can you trade your car in after refinancing it?

Refinancing a car loan means reducing your payments while keeping your existing car. A trade-in may be a better option if you want a new vehicle. However, if you have recently refinanced your current vehicle, it shouldn't stop you from trading in your car for a new one.

After refinancing your car loan, you have a lien on it, the same as you did when your car had its initial loan. This means that the bank or other institution making the loan has a “hold” on the car, and you can't sell it or trade it in without first resolving that hold by paying off the loan.

Because refinancing involves taking out a new loan with new terms, you're essentially starting over from the beginning. However, you don't have to choose a term based on your original loan's term or the remaining repayment period.

Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.

What is the interest rate today?

This may be a good move if you secure higher returns than the interest rate on your refinanced mortgage. But keep in mind that there is a risk of loss with every investment. If you refinance, then lose money, you will end up in a worse financial position than if you had not refinanced.

Refinancing your car means replacing your current auto loan with a new one. The new loan pays off your original loan, and you begin making monthly payments on the new loan. The application process for refinancing doesn't take much time, and many lenders can/may make determinations quickly.

You can turn over the key and walk away, free and clear. Your mortgage contract allows it. The bank can't come after you to collect the rest of the money owed. You pay a higher interest rate for a mortgage with a walk-away option and should feel free to use it, if that makes sense for your family and your future.

In a cash-out refinance, a new mortgage is taken out for more than your previous mortgage balance, and the difference is paid to you in cash. You usually pay a higher interest rate or more points on a cash-out refinance mortgage compared to a rate-and-term refinance, in which a mortgage amount stays the same.