You may have heard a lot of positive hype about refinancing home mortgages. But do the same costs and benefits extend to the realm of your vehicle or auto loan?

In a past article, we highlighted why getting your auto loan through a credit union, like Valley Credit Union, can be a winning move. If you want the best service and loan options, it’s really the only way to go.

In this post, we dig a little deeper into the good, the bad, and the ugly of car refinance. You’ll learn more about the pros and cons of refinancing a car and how doing so could be a smart financial move. We’ll also explore some drawbacks to refinancing your auto loan and things to consider before signing on any dotted lines.

Car Refinance 101

Before weighing the pros and cons of refinancing a car, it’s useful to make sure you understand a few vehicle refinance fundamentals.

What is vehicle refinancing?

Vehicle refinancing is the replacing of an auto loan with a new loan to change the terms of the contract. Loans are usually refinanced to change the loan amount, the size of the payments, length of the agreement, or some combination thereof.

Are there alternatives to refinancing a vehicle loan?

The short answer is: yes, there are more options available today than ever before. Depending on your objectives for a refinance and your personal situation, alternatives such as peer-to-peer lending, a personal loan through fintech platforms, or balance transfers to a low-interest credit card may be viable options. Each has its own pros and cons — it’s just a matter of finding the right solution for you.

Assess Your Situation

In many cases, the pros and cons of car refinancing are subjective. What works well for one person may be detrimental for the next. This is often due to variables like an individual’s finances or reasons for seeking a refinance.

Thus, it may help to ask yourself these questions prior to weighingn the pros and cons.

Am I eligible for auto loan refinancing?

The details of your financial profile will tell you this. If your credit score has improved significantly or your debt-to-income ratio has shifted positively, you may be eligible for auto refinancing. If you’re unsure, ask your banker or credit union representative for assistance. If you don’t qualify for auto loan refinancing, it may be an appropriate moment to shift gears and explore some of the aforementioned alternatives.

Why do I want to refinance my vehicle loan?

Perhaps your goal is to lower monthly payments. Maybe you’re looking for a quick injection of cash into your savings account. Some borrowers seek car loan refinancing to reduce interest payments or rates due to recent Federal Reserve rate cuts. Understanding your motivation is critical because it will impact how you evaluate the pros and cons.

Additional Considerations for Refinancing

The Impact of Inflation and Economic Trends

The economic landscape plays a significant role in refinancing decisions. Rising inflation can strain monthly budgets, prompting many to seek refinancing as a way to lower monthly payments. However, when interest rates rise in response to inflation, refinancing might not yield the same cost savings as in previous years.

It’s essential to examine current economic trends when considering a refinance — low rates from credit unions, like Valley Credit Union, can still provide relief even during periods of economic uncertainty.

Special Considerations for Electric and Hybrid Vehicles

As electric and hybrid vehicles become more popular, refinancing options for these types of vehicles have expanded. Some lenders now offer green loan programs or incentives for refinancing energy-efficient vehicles.

For example, certain credit unions and banks may provide discounted rates or extended loan terms specifically for electric cars. Additionally, as electric vehicles tend to depreciate differently than traditional gas-powered vehicles, it's crucial to review the car's current market value to ensure refinancing is worth it.

Potential Pros of Refinancing Your Car Loan

You may have a lot to gain by revising your loan, here are some of the pros to consider:

Lower Interest Rate

You may be eligible for a lower interest rate. If your credit score has improved or if market rates are favorable, you could see significant savings over the life of the loan. Be sure to compare lenders and check current rate trends to secure the best deal.

Cash Back

If your car is still worth more than the outstanding value of your current loan, you may be able to get a nice lump sum of money. This is called cash-out refinancing. This can be helpful if cash flow is your major concern but be cautious — taking equity out of your vehicle can lead to negative equity.

Length of Loan

Depending on your financial goals, a shorter or longer loan term could be beneficial. A shorter term may save you money on interest payments, while a longer term can reduce your monthly payments but may increase total interest costs. When refinancing, this is just another factor you may be able to adjust to better suit your needs.

Possible Cons of Refinancing Your Car Loan

There can also be downsides to renegotiating your auto loan to consider:

More Expensive in Long-Run

The total cost of financing your vehicle could go up. This can happen in situations where your auto refinance means you’re paying for a longer amount of time, have a higher interest rate, or incur penalties or fees. Keep an eye on total interest costs when calculating whether refinancing is worth it.

Cash Payment

If your car is worth less than the remaining amount of your loan, you may have to pay back the difference in cash before you can refinance. This is becoming more common with the rapid depreciation of vehicles, particularly traditional gas-powered cars.

Penalties & Fees

Some lenders penalize borrowers for early repayment of loans. You may also be charged loan refinancing application and/or processing fees. Before refinancing, ask your current lender for a full breakdown of potential fees.

Minimal Monthly Savings

After you go through all the effort of refinancing your car loan, you might not actually see much extra money in your pocket. This could happen if interest rates haven’t fallen substantially since your original loan. Compare quotes from multiple lenders to avoid this pitfall.

Higher Interest Rate

If your financial health or credit score has worsened since you took out your original vehicle loan, you may only qualify for higher interest rates. Restructuring other aspects of your loan (like duration) could also bump rates up. It’s important to shop around and consider all factors (not just the monthly payment) before refinancing.

Crunch the Numbers

Once you’ve thought about your personal situation and priorities, and learned about some pros and cons of refinancing a car, you can run some numbers. This can help you determine what refinance loan terms make sense for you. Using our online loan calculator makes doing the math easier.

As you’re doing this, bear in mind that to minimize the lifetime cost of your auto loan, you want the lowest interest rate and the shortest-length loan you can afford. For electric and hybrid vehicles, consider whether any eco-loan incentives could reduce costs further.

Armed with knowledge and data, it should become more evident if refinancing your vehicle loan is wise. At the very least, the trade-offs you’ll be making by opting for or against refinancing should be clearer.

If you’d like to learn more about refinancing your car loan, make sure to check out our Complete Guide to Refinancing Your Auto Loan.

Let Valley Credit Union Help You with Your Vehicle Refinancing

Maybe, even after reading up on refinancing your vehicle, you still have questions or aren’t sure what to do. That’s why Valley Credit Union’s dedicated and knowledgeable staff is here for you. You always have a helpful guide to lead you through the complexities of financing, so you can be confident in the choices you make.

If you opt to refinance your car loan, our team will work with you to get the best rates and terms. We’ll make the process and paperwork as simple and quick as possible. It’s our commitment to provide you a hassle-free vehicle refinancing experience and stellar loan products and services.

About the Author

 Katie Clark, Director of Administrative Services

Katie Clark has been at Valley Credit Union since 2011. She serves as the Board Secretary and oversees Human Resources, Marketing and Facilities for the credit union, some even call her the credit union mom. As a CUNA and GoWest HR council member she stays connected with the latest industry happenings. When she’s not in the office she enjoys weekends with family & drinking wine at the Oregon coast.