How can a consumer determine if cash back refinancing for their car is a good idea? For most cash back auto refinance products, the answer depends on the terms of the loan, the interest rate, and the borrower's economic needs. The immediate potential benefits are obvious: lower interest, lower monthly payments, and relatively cheap cash for other expenses. Consumers should examine their reasons for seeking cash back refinancing and evaluate the potential risks involved.
When Cash Back Auto Refinancing Makes Sense
Cash back auto refinancing makes sense when the new loan provides cash the car owner needs and better auto loan terms than he or she currently has. Cash back auto refinancing exists to meet three needs:
- Lower the interest rate
- Lower the monthly payment
- Get additional cash for other expenses
Monthly payments can be lowered by reducing the interest rate, and / or extending the total time it takes to pay off the vehicle. Borrowers should understand, however, that extending the total repayment costs more because they are paying interest over a longer period of time.
Conversely, the total interest paid can be reduced by dropping the interest rate and also by shortening the loan's term. Typically, the shorter the loan term, the lower the interest rate, so borrowers can double up on savings by choosing a new loan with a shorter repayment schedule.
For a lot of people, automotive loan deals are better today than they were a few years ago. Many who bought cars with dealer financing got rates several percentage points higher than necessary. Shopping smarter this time around could save them money. In other cases, the borrower's credit may have improved, qualifying him or her for a better deal today.
People with good credit can find a range of lenders who compete for refinancing business, dangling cash incentives and creating packages that can improve the terms of their loans. Cash back refinancing secured by a car may provide the cheapest money available, especially for those who can't borrow against home equity.
The potential savings are impressive. For example, refinancing a five-year $25,000 auto loan at 7.75 percent interest after the first year to a four-year loan at 4.75 percent can save the consumer nearly $1,400 in four years. LendingTree's auto loan refinancing calculator can help borrowers evaluate their options and see potential monthly payments at today's lower interest rates.
Potential Drawbacks to Cash Back Refinancing
Making additional credit available to those with debt problems may not be doing them any favors. For consumers who don't manage money well, increasing installment debt with a cash back auto loan could put their vehicle at risk for repossession. Anyone considering a cash back refinance should understand this.
In addition, extending the term of a car loan lowers the monthly payment, but the longer the term, the longer the consumer pays for a rapidly depreciating vehicle, and the higher the interest expense becomes. When refinancing a car, selecting a shorter term usually results in a lower rate, faster repayment and less interest expense.
Borrowers should consider the fees of refinancing when evaluating a transaction. They can offset or even wipe out any savings a lower rate might bring.
Perhaps the single-most important piece of due diligence a borrower should perform in evaluating potential refinancing products is to scrutinize the fine print to determine if there are unnecessary or bloated fees, extensive cash payments, and potential negative equity on the vehicle.