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Buying a car is an expensive endeavor. Because of this, most people look for the best auto loans when the time comes to get a new vehicle. However, many people get stuck with bad auto rates or have other reasons why they may need to refinance their car. Still, there is debate about weather or not essentially starting a new auto loan is a smart financial decision as it has several pros and cons.

Pros of deciding to refinance a car loan

There are many reasons why drivers may want to refinance their car. In fact, it’s a growing practice among people who still owe money on their vehicles. In a nutshell, refinancing means that owners essentially apply for a new car loan, often with a new company. The new financial institution pays off the loan, and the driver enters into a new contract with said company. 

Deciding to refinance a car can lead to better auto rates

People looking for the best auto rates often refinance
Auto refinancing | designer491 via iStock

\Most buyers don’t qualify for the best auto loans when it comes to rates. Because of this, many enter into not-so-pleasant deals and decide to refinance their car once their credit or income has improved. In some cases, this could lead to a lower monthly payment. Buyers should know that refinancing doesn’t always lead to better auto rates. 

You could pay off the vehicle sooner

Even people with the best auto loans typically want to pay them off quickly. Refinancing the vehicle could help make this goal more possible. This is because qualified owners can get a lower interest rate on their auto loans and contract for a shorter timeframe than their original loan. This works well for people who may have more income than they did before. 

You can remove a co signer from the loan

Some people with car loans have a co-signer on the agreement. However, deciding to refinance a car could allow you to remove that person from the contract. This could be a solid idea for people who couldn’t get approved previously for a car but now have the credit profile needed for a loan. 

Cons of deciding to refinance a car

As with anything, deciding to refinance a car has downsides. However, it’s up to the vehicle owner to decide if this process is worth the downsides.

It can be expensive

Refinancing can be attractive because of the possibility of a lower monthly payment. However, buyers should be aware that they may end up paying more interest than they would have without refinancing. This is especially true for people who sign lengthy contracts with the lender. Additionally, there might be fees with refinancing, such as paying for registration. This process can also lower your credit, as sometimes paying off a loan before the contract ends can have this impact. 

You could become upside down

One of the harsh realities is that many people who owe on cars are upside down in their loans, which means they owe more than the vehicle is worth. According to Auto News, about 1 in 5 vehicle sales involving a trade-in had loans in this state. Unfortunately, this is possible when refinancing, as many owners get lengthy contracts. 

Deciding to refinance a car can be a sound financial decision. However, owners must have a clear goal in mind for doing so.