A lower car payment, what's not to like?
It's an enticing proposition, but refinancing an auto loan can often significantly increase the amount you have to pay over the life of a loan.
"The concept of lowering your monthly payments will often outweigh the financial sensibility of that decision," said Jack Gillis, auto expert for the Consumer Federation of America.
And yet, a growing number of borrowers are electing to refinance their auto loan. Last year, auto loan refinance inquiries on LendingTree.com nearly doubled from a year earlier, according to the online lending service. Completed loans jumped 47 percent from the previous year.
But when might refinancing your auto loan be a smart move? Here are four factors to consider:
1. Interest Rates
Refinancing an auto loan enables you to pay off your lender and take on a new loan at a more favorable annual percentage rate, or APR.
That means that you generally wouldn't consider refinancing unless you can get a lower APR. But there is an exception: If you want to lower your monthly payment and are willing to extend the repayment period for your loan. Of course, you will be paying more money over time.
Unlike mortgage loan refinancing, lenders generally don't charge fees or closing costs to refinance an auto loan. That places a priority on shopping around for the best rate. In recent weeks, auto loan refinancing offers on LendingTree have been available for 1.99 percent for borrowers with the best credit scores.
Check lender websites or portals like Bankrate.com or LendingTree.com.
2. Estimated Savings
The most attractive outcome in any refinancing is to lower the amount of you will repay during the term of the loan.
Maybe you didn't shop around when you went car shopping and feel you could have negotiated a lower interest rate. Or perhaps your credit score has improved significantly since you took out your auto loan, so you are now able to qualify for a lower interest rate. Refinancing could trim your finance charges.
Paying off your original loan when you refinance could help boost your credit score, as the loan would show up in your credit history as paid off.
Lenders and financial information sites often have online calculators that can help you estimate whether a new loan will save you money.
Many free financial apps are also available for smartphone and tablet users.
3. Term Of Loan
Prolonging the life of a car loan also can be risky because -- unlike real estate which can appreciate -- cars lose their value over time. Extending the loan term means that you will owe more on the vehicle than it's worth for a longer period.
"This is a terrible position to be in if the car gets stolen or gets in a serious accident or you desperately need to sell," said Gillis.
One rule of thumb: If you have less than two years left on your loan, avoid refinancing. "If it's a cash-flow issue, it's a consideration, but I wouldn't do it," said Rick Finch, general manager of LendingTree's auto segment.
4. Lender Limitations
Banks often cap both the amount they will lend and the repayment period for a refinancing. They may also limit the kinds of vehicles that are eligible.
Some lenders won't refinance loans on motorcycles or recreational vehicles, for example. And typically, lenders will only refinance vehicles that are no older than seven years.