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Sometimes a car loan becomes more challenging than you had planned. Maybe you changed jobs or had some unexpected bills come your way. Or you no longer have money coming in that you had counted on. Even rising grocery prices can make it tougher to pay your auto loan as agreed.
Refinancing is one way to reshape your auto loan into something that works better for you; auto loan modification is another. However, each method solves different problems. If you’re trying to choose the best path forward, understanding the difference between auto loan modification vs. loan refinance will help.
Auto loan modification is when the lender adjusts your existing loan terms, usually to make it easier to make your payments. You keep the same loan, but the lender agrees to changes such as a lower monthly payment and a longer loan term.
Loan modification is a type of relief option you may be offered if you’re experiencing financial hardship. For example, if you lost your job and are at risk of being late on car payments. An auto loan modification is typically a permanent change to your loan terms, not a temporary one. It’s specifically designed to help you afford your payments so you don’t fall behind or default on the loan, and it could be a solution if you’re trying to avoid refinancing with bad credit.
Auto loan modification could end up costing you more in interest charges, since the payment term is extended, adding more payments to your loan. However, the extra financing cost could be worth it to avoid the damage caused by defaulting.
Auto loan modification could impact your credit if your lender reports it to credit bureaus. If you’ve already experienced a hit to your credit due to late or missed payments, modifying your loan won’t change that or remove it from your credit report.
Auto refinancing replaces your existing loan with an all-new auto loan, often from a different lender. A refinance loan usually has better terms, like a lower monthly payment or a better interest rate.
Some people refinance so they can switch lenders and have better customer service. Others want to save money in the long term, by reducing their total interest costs with a lower rate or shorter term. Since the auto refinancing process involves applying for a new loan, you’ll need to qualify all over again.
The requirements for refinancing typically include:
Refinancing could have a minimal impact on your credit. When you apply for the loan, the lender will run a hard credit inquiry, which could drop your score by a few points. However, this dip is usually temporary.
Now that you understand each term, let’s compare loan modification vs. refinance side-by-side.
Although both methods can help you lower your payment, they go about it differently. And while loan modification lets you keep your current lender, it could wind up costing more in the long run. Refinancing lets you switch lenders, so you may end up finding a better rate and saving money.
You can see below which differences could impact your financial goals.
When trying to decide between a loan modification vs. refinance, think about which option is going to better fit your needs and your long-term goals. In some situations, a loan modification will help you get your finances back on track. In other cases, auto refinancing will be a stronger option.
Loan modification keeps your current lender but adjusts terms when you’re having financial problems. It is best when:
Auto loan refinancing gets rid of your current loan and replaces it with a new one. It’s best when:
It’s smart to want to make the right move with your car loan. If you’re having trouble deciding which option is best, look closely at your monthly payment, interest rate, and credit report. Use an auto refinancing calculator to see how each variable could affect your loan and overall costs.
With RefiJet, you can pre-qualify for auto-refinancing with no impact to your credit. That will let you see personalized offers and compare them. Explore all your options and move forward confidently knowing that you’ve done your research.
Here are answers to some frequently asked questions about loan modification vs. refinancing.
An auto loan modification makes changes to your current loan to make it more affordable, while refinancing replaces your loan with an entirely new loan from a different lender. Loan modification usually lowers the payment and may extend the loan term. Refinancing lets you choose a loan with all-new terms.
Refinancing may not be possible if you’ve fallen behind on your payments, because that can have a negative effect on your credit. It’s possible your application could be denied for poor credit. Loan modification could be a path forward by adjusting your current loan to be more affordable instead.
Yes, it could. Refinancing usually has a temporary, small effect on your credit score — fewer than five points for most borrowers. However, if the lender reports a loan modification to the credit bureaus, it could signal financial distress and impact your credit.
Refinancing fees vary by lender. Check your loan offers carefully and look for fees such as application fees, origination fees, title transfer fees, or loan prepayment penalties. Loan modification, on the other hand, may not involve any fees at all.
It’s possible the lender could change your interest rate with a loan modification, but it’s more likely they will extend the term instead. Refinancing may be a better option if you want a lower interest rate.
Wondering when to refinance your car loan? Learn the best timing, the signs you will benefit, and what to check before applying.
