Should I Refinance My Car Loan Even If It Costs More Monthly? Here’s My Dilemma

A Reddit user is considering refinancing their car loan. Many people refinance to save money, but this poster would end up paying more if they took out the new loan to pay off the old one.

Should they go through with it anyway, or would getting the new loan be a big mistake they come to regret?

Should the Reddit poster refinance his loan?

The Redditor explained that he has been paying $610.10 per month on his auto loan, which has a 9.92% interest rate. He has 63 months left on his loan. If he refinances to the new loan, though, he will have 60 months left on the new loan, and the interest rate will total 6.140%. He’ll end up paying off the loan faster by saving three months of payments — but his new monthly bill will come up to $643.40 per month. 

A quick look at the numbers shows the poster will end up paying about $33.30 more per month. That’s not a huge amount. But, it’s also important to look at the total borrowing costs over time before making a decision. Here’s what that looks like: 

• 63 more months of payments at $610.10 would come to a total of $38,436.30. 
• 60 more months of payments at $643.40 would come to a total of $38,604.00

When you run these numbers, something is very wrong. Shortening your payoff timeline often should increase your monthly payment, even with an interest rate drop. However, it should also save you money on interest over time. In this particular case, that’s not happening. The OP is somehow paying 3.78% less in interest for his loan, and is paying interest for less time, but is ending up with higher total loan costs. The financing company for his car loan must be tacking on a ton of fees or hidden costs here. 

It’s problems like this that prompted so many Reddit users to tell the original poster (OP) that he needed to look at loan costs over time and to look carefully at all the other loan terms, rather than just listening to the numbers that lenders want you to see. Only by understanding what your monthly payments and total costs over time would be can you make an informed choice. 

Should you refinance a loan even if your monthly payments increase?

In this particular example, the Redditor should walk away fast because the loan he’s being offered seems like a scam.

As a general rule of thumb, though, there are times when it does make sense to refinance to a loan with higher monthly payments. If you can drop your interest rate, shorten your payoff timeline, and still afford the payments, you can become debt-free for much less money and on a much faster timeline. This allows you to free up your funds for other important financial goals.

You’ll always want to review the details carefully, though, as this poster’s experience shows.

In fact, you may want to work with a financial advisor who can help you make decisions like this one, as your advisor can provide insight into how the borrowing choices you make will affect your financial security over the long term. There are just too many bad loan products out there for many people to go it alone, especially in this time of high rates, and working with a professional to make these and other important money decisions can save you a lot of headaches in the future. 

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