When you refinance a vehicle, you are applying for a new loan with more favorable terms than the one you currently have.

• Is it a bad idea to refinance a vehicle? Refinancing a car loan isn’t necessarily a bad thing, but it could harm your financial situation if you choose to refinance when it doesn’t make financial sense for you. The following are examples of situations where refinancing may be a bad debt decision:
• You’re upside-down on your loan, meaning you owe more money than the car is worth.

1) If you require more manageable monthly payments

According to experts, the average new car monthly payment in 2018 reached a record-high of $531, setting a new high for the year. If you’re unable to afford such high-interest rates month after month, this type of bill could have a serious impact on your financial situation, depending on your debt-to-income ratio.

With a refinanced loan, you may be able to extend the duration of your loan; however, it’s important to remember that a longer loan term almost always results in more money being paid in interest because interest rates compound over time. Defaulting on a loan as a result of missed payments, on the other hand, could have far more serious ramifications. Lenders may resort to aggressive debt collection tactics to collect on defaulted loans, which may include repossession of your vehicle to satisfy loan debt.

2) If you’re able to negotiate a better interest rate on your loan

Increasing your loan balance by paying too much interest can quickly increase your loan balance, trapping you in a vicious cycle of revolving debt. Consumers who want to reduce the amount of interest they pay on their auto loans may want to consider refinancing their vehicle as an option.

To compare your current loan with a refinance loan, use car refinance calculator.

The following are the two most common reasons why you may be able to obtain a better interest rate when refinancing your car loan.

• Interest rates at the federal level are decreasing.
• If you make a positive change in your financial wellness, you may be eligible for a lower interest rate (more on this in a moment)

Depending on whether or not the Federal Reserve decides to lower interest rates, your lender may be able to lower their loan rates to keep up with the current trend. If this occurs, you may be able to save money by refinancing your auto loan.

Even if you are approved for a loan with a lower interest rate than the one you currently have, make sure that the savings you realize from lower interest rates outweigh the cost of refinancing your loan.

If you are eligible to receive a more favorable loan agreement,

Another reason why consumers choose to refinance is when their financial situation has improved since they applied for the loan in the first place, according to the Federal Reserve. A rise in your credit score, for example, may entitle you to lower interest rates or more favorable loan terms if you refinance your mortgage debt.

The following are the risks of refinancing an auto loan:

• Associated costs when considering whether or not to refinance their auto loan, consumers should carefully consider the costs associated with the process. For a refinanced vehicle, the average lender fee is $10, and the average title fee is typical $75 or less; however, the rates may vary depending on the lender and loan type. If the total cost of the refinance is greater than the amount of money you will save on the new loan, it may not be worthwhile to proceed with that particular loan arrangement.
• There has been an increase in interest.

Ultimately, the goal of refinancing a car is to get a better deal on your loan agreement; however, if your loan is extended, it may end up costing you more money. Consider this: the longer you have to make monthly payments on your loan, the more interest you’ll accrue on the principal. In addition to taking into account the costs of refinancing, consumers should consider the actual savings they will realize as a result of the new loan terms they have chosen.

As a result of your newfound knowledge of the risks and benefits associated with refinancing a vehicle loan, let’s examine several scenarios in which it might be advantageous to refinance your vehicle.