When and How to Refinance an Auto Loan

Let’s say that about a year ago, you bought a car and opted to finance it instead of buying the car in cash. If you didn’t get the best deal on your loan at purchase, you might be able to refinance in order to take advantage of lower interest rates, lower monthly payments, or a shorter loan term.

Because refinancing can help save you hundreds or thousands of dollars in interest over the entire loan, shopping around can be worth it! After all, getting rid of the stress that comes with debt is never a bad thing.

Refinance Your Auto Loan If …

• Interest rates are lower. Even a difference of 1% can save you money. Rates are pretty low right now! I’m a fan of PenFed Credit Union, and they’re currently offering rates between 1.49% and 3.99%. You can compare current rates from multiple loan providers on Bankrate.

• You want to pay it off faster. If you’ve knocked out your higher interest rate debt and you’re ready to tackle your car loan, consider shortening the length of your loan when you refinance. You may be able to lower your interest rate in addition to cutting a year or two off your loan!

• You have a better grasp on your finances. Your credit score and debt-to-income ratio affect the terms you can get on an auto loan. If you’ve made progress on other debts and/or increased your income, and your credit score has improved, look into refinancing to see what new terms you can get.

• You didn’t shop around when buying the car. If you took whatever loan terms the dealer handed to you, you might not have gotten the best loan. See what different banks and credit unions are currently offering. (And to anyone about to buy a car — shop around for the best loan before you buy!)

• You’re struggling to afford your car payments. Refinancing can help lower your monthly payments by stretching out the length of your loan. It might cost you more in interest payments to do this, but it could also free up monthly cash flow to redirect to your higher interest debt, like credit cards.

Here’s How to Refinance

• Evaluate your current loan terms. You should begin by knowing the terms to beat! Check the interest rate, monthly payment, and the number of months you have left on the loan. (For some reason, car lenders make it really hard to find the interest rate on the car loan, so you might have to call the number at the top of your monthly statement.)

• Check your credit. You can quickly get your credit score using Credit Karma. You can also get a free credit report from each of the three major credit bureaus each year to see what might be affecting your score.

• Apply to a few lenders. Do this within a two-week timeframe so all the credit inquiries will be grouped together (this prevents all those hard credit pulls from dinging your credit score too much).

• If there’s a loan that better fits your needs, that new lender will pay off your old loan and you’ll make loan payments to them from now on.

When Is Refinancing Not For You?

• You drive an old car. Because of depreciation, lenders might not offer you a refinancing deal on an older car (or one with a lot of miles on it).

• Your loan is mostly paid off. This is because most of the interest is paid off earlier in your loan, and the later payments mostly apply to the principal. So in this case, refinancing wouldn’t save you much on interest because you don’t owe a lot in interest at this point.

• Your car is worth less than the loan amount you have left to pay. Lenders will view this as risky.

• Refinancing fees make the new terms less attractive. Some loans charge a fee if you pay it off too fast, which would happen if the refinancing lender pays off your original loan all at once in order to grant you a new loan. Read the fine print on your loan to fully understand what additional fees you may be charged.

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