Is Refinancing a Car Loan a Bad Idea?

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Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


, Contributing Writer - April 27, 2021

Borrowers typically refinance their car loans to save money on their monthly payments. But, it’s not a good idea to refinance in every situation. Here are some scenarios when it may make sense to simply finish out your existing auto loan without refinancing.

When Refinancing Is a Bad Idea

If you think you can qualify for refinancing, here are some situations where it might be a bad idea to refinance right now:

  • You only qualify for a longer loan term

If you apply for refinancing and can’t get a lower interest rate, just a longer loan term, then it may be a bad idea to go through with it. A longer loan term on an auto loan means more interest charges because most car loans use a simple interest formula. With simple interest, your interest charges add up daily based on your loan balance. The longer you stretch the term, the longer it takes to bring down that balance, so that means paying more in interest.

It may only be a good idea to solely extend your loan term for a lower payment if you’re struggling to keep up with your car loan. Default is a worse outcome than paying more for the vehicle, though. If you’re aiming to refinance to make your loan more affordable and avoid default, just be aware that you’re going to pay more if you just extend the loan.

  • The loan term is almost over

If you’re nearing the end of your loan and you want to refinance, it may not save you that much money. Many auto lenders prefer to approve refinancing for car loans that are at least a year old, and not too close to the end of their loan term.

If you’re nearly finished with the loan and you have a good amount of equity, it may be a better idea to trade in the car for something else and use that equity as a down payment on your next vehicle purchase. If you refinance a loan that’s nearly done, it means paying on the same vehicle for longer – giving it more time to depreciate, lose some equity, and allow more time for interest charges to stack up. The longer you wait to sell the car, the less money you’re likely to get from the sale.

  • If you’ve refinanced before

If you’ve already refinanced your vehicle before, doing it again may not be a good idea. Remember that cars are always losing value – the more you drive them, the more wear and tear and mileage are tacked on. Newer models are always being released, which also drives your used car’s value down even further.

If you continue to have a loan on the same vehicle for years to come, it’s going to be tough to stay in an equity position. Additionally, if you keep extending your loan term on the same car, you may end up paying way more for it than it’s actually worth.

What it Takes to Refinance a Car Loan

Figuring out if refinancing is a good idea for you starts with determining if your car loan and vehicle are eligible. The goal is almost always to get a lower monthly payment and possibly save cash in the long run.

Refinancing means replacing your current auto loan with a new one. The old one is paid off by the refinancing lender, and you start another one with new loan terms and possibly a new interest rate on your existing vehicle. Some borrowers ask their current lender to refinance, but often, they look elsewhere for a chance at a better deal.

To qualify, refinancing usually requires a good credit score, above 660. However, refinancing lenders may be willing to work with a borrower that has an improved credit score. If you had bad credit when you started your loan but it’s better than it used to be, you may still have a shot at refinancing.

Another requirement of refinancing is that your vehicle has equity. Your car must be worth at least what you owe on your loan. Other typical vehicle requirements include: having less than 100,000 miles, being less than ten years old, and having a loan that's at least one year old. All lenders vary in their specific requirements, though.

Refinancing Not the Answer?

Refinancing isn’t for everyone or even an option for every vehicle. However, most dealerships do accept trade-ins for running cars. And, you can trade in a vehicle that still has a loan on it.

If you’re looking for a lower monthly payment, but your situation doesn’t line up with refinancing requirements, then it may be a good idea to trade it in for something more affordable. Remember that if you have a car with equity it can be used to lower the selling price of your next vehicle. Equity can also be used to meet a down payment requirement of an auto lender – a common requirement for bad credit borrowers.

Need Some Help With Auto Financing?

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, Contributing Writer

Bethany Hickey is a graduate from the University of Michigan-Flint, with a bachelor’s in English-Writing. She is a content writer for Auto Credit Express, CarsDirect, and many other automotive blogs, as well as the Poetry Editor for UM-Flint’s writing magazine.


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