When people take out a car loan, they are only thinking about making the payments month on month as they agreed. However, as their financial circumstances and market conditions change, refinancing the loan may be a smart option to consider.

For those who may be considering refinancing, here are some pros and cons to keep in mind.

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Lower Monthly Payments

Lowering monthly payments is usually the most attractive option for those who want to refinance car loans. It’s easy to compare rates from different lenders using online platforms, such as Lantern by SoFi. Along with helping those individuals who may be close to falling behind on their payments, refinancing will free up funds to be used to pay off a debt that has a higher interest rate, such as credit card debt.

Paying Less Interest

When people who have no or poor credit are approved for a car loan, the loan itself usually comes with a very high interest rate. However, once they have made their payments on time for a year or more, most people will qualify for a lower interest rate.

By taking advantage of this, they can save themselves from paying thousands of dollars in interest over the life of the loan.

Going Upside Down on the Loan

While refinancing has many advantages, one distinct disadvantage to many car buyers is the risk they will take of going upside down on their loan should they refinance. For example, if refinancing is done to lengthen the loan’s term or to allow the person to tap into their car’s equity, they could wind up owing more on the vehicle than it is actually worth, hence the term upside down.

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Should this happen and they then decide to sell the car or trade it, the lender will have to be paid the difference between the car’s true value and the amount still owed. In many cases, this is thousands of dollars.

Paying More in Interest

When people refinance their car loans, they are always expecting to pay much less in interest. However, even if they refinance at a lower rate, they may actually end up paying more in interest than they would have with their original loan.

This usually occurs when refinancing is done to get a longer loan term, and the extended time of making payments can rarely offset the interest that is paid over an extra one or two years.

Paying Off the Loan Early

People who have a substantial increase in their income should seriously consider refinancing so that they can pay off their loan early. Since refinancing enables much more of the monthly payment to go toward the loan’s principal, this is a smart way to wind up with one less monthly payment as part of one’s budget.

Since every person’s financial situation is unique, it is always best for them to carefully consider the pros and cons associated with refinancing. By relying on expert advice and doing some research on their own, they can make an informed decision.

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