What Are the Downfalls of Refinancing a Vehicle?

Refinancing an automobile loan is an attractive way to consider lowering monthly payments and reducing monthly cash expenses. However, it is important to carefully weigh the short-term benefits against any long-term consequences. Automobiles lose value at an alarming rate, some much more than others. Refinancing can appear to be the solution to a current financial bind but could lead to extended financial obligations difficult to meet in the not-so-distant future. If refinancing, make long-term plans regarding future expenses, and factor in the extended monthly car payments and the drain they will create on other expenditures.

Depreciation

Automobiles lose a significant portion of the retail sales price as soon as the sales deal closes. This depreciation reduces the loan-to-value ratio and thus reduces the amount of collateral on the car loan. Refinancing the loan at any stage will mean refinancing a vehicle with tremendously less value than the original loan. The original loan balance will need to be paid in full while the new loan will only cover the current value. The difference will need to be paid either as a cash payment or extending the length of the loan several more months or years than the original loan term.

Interest

Low loan payments always seem attractive. Refinancing a loan to reduce the payment may seem to make current financial situations more palatable. Unfortunately, the lower payments must be paid for with a longer loan period. The longer loan period means accumulating interest must be paid. What appeared to be the solution to a short-term financial strain results in an extended financial obligation long after the vehicle is cost efficient.

Maintenance

Refinancing an automobile means keeping the automobile longer. These added miles mean more wear and tear on the vehicle's mechanical systems. The benefit of low payments can result in extended costs maintaining the vehicle. With the extended loan period, the vehicle is not attractive trade option because of the high payoff amount versus the low wholesale value.

Total Costs

When considering refinancing a vehicle, consider the total cost of the loan. There will be additional interest paid even if the interest is at a lower rate. The vehicle's lifespan will need to be extended to cover the time the vehicle is tied to the loan. Also, there is the total cost of the principal paid on the first loan plus the total costs of the refinanced loan to take into account.