The Pros

You Can Lower Your Monthly Payment

If you have a car payment that's too large for your budget, refinancing your auto loan can reduce your monthly loan payment. By extending the term of your loan, refinancing can help by reducing your monthly payments by around $100 or more. By extending the term of your loan, you may pay more in interest over the life of the loan. However, having a lower payment due each month on your auto loan can free up funds to pay off other higher-interest debt or help through times of financial difficulty like a sudden drop in income.

You Can Shorten the Length of Your Loan

If your income has increased since purchasing your car or you didn't get the most favorable terms when you first purchased your car, you should consider refinancing your auto loan to a shorter term and lower interest rate to pay off your loan sooner. While you can pay more than your current monthly payment on your auto loan, refinancing can help to direct more of your payment to principal, saving you more.

You Can Get Cash in Hand Quickly

If you need cash on hand quickly, you may be able to use your car's equity (the value of your car minus the amount you owe on it) to borrow money with a cash-out auto refinance.

The Cons

You Could Pay More in Interest or Have to Pay Fees

Refinancing your auto loan to a longer term to reduce your monthly payments could mean paying more in interest fees over time. Also, some lenders may penalize you for paying off a loan early. Additionally, you may be charged state fees to re-register your vehicle or transfer the title.

Your Credit Score Could Drop — Temporarily

Since lenders need to check your credit before approving you for an auto loan refinance, your credit score could dip because of the inquiry. However, the drop should only be a few points and is temporary. Making your monthly payments in full and on time should offset the minor hit to your score.

You Could End Up Upside Down

Being upside down (or underwater) on your auto loan means that you owe more than what your vehicle is worth. Being upside down may not hurt you if you're able to keep up with payments and keep your vehicle until the loan is paid off. However, being upside down can impact you negatively if your car is totaled or you need to trade in your vehicle for something cheaper, causing you to have to pay negative equity.

Is Refinancing Right For You?

When is a good time to refinance your auto loan? How can you best determine if refinancing is a good idea for you? Based on the pros and cons of refinancing your auto loan, it makes sense to refinance your auto loan: 

If Your Interest Rate is Much Higher Than the Rate to Refinance

If you purchased your vehicle at an interest rate around 6% or more, refinancing to a lower rate can help you to save money over the life of the loan. Getting financing directly from your credit union, instead of a dealer, can help you get the most competitive rate.

If Your Credit Score Has Improved

If your credit score was less than stellar when you first purchased your vehicle, it's likely that you were approved for a loan with a much higher interest rate. If you've been working to build your credit score since then, with on-time and in-full payments, you'll likely have a higher credit score — making you eligible for a better interest rate if you refinance. 

If You Need Cash for An Emergency or Debt Repayment

Refinancing your auto loan can give you the cash you need to pay for unexpected medical bills, repairs, or pay off higher-interest debt. 

If Your Lease is Close to Expiring

Most lease deals have an option to buy the vehicle after a certain point, and refinancing can help you buy your lease. Crunch the numbers and make sure the new monthly payments on your vehicle are more affordable than leasing another car. 

Now that you know the pros and cons of refinancing your auto loan and when refinancing your vehicle can best benefit you, shop rates and do the math. If you are approved for a better rate elsewhere, in some cases, your financial institution may be able to match that rate.