What to know about refinancing your car loan


Refinancing is the process of replacing an existing loan with a new one, usually through a different lender. Most people will use it to lower their monthly payment, either by getting a lower rate or by extending the term of their loan.

In general, refinancing is a good idea if it saves you money on interest over the life of your loan. But it’s not for everyone, so think carefully before applying.

4 tips to follow when refinancing your car loan

Refinancing is a great way to save money on interest and potentially lower your monthly payment. Take your time to compare lenders and find a good deal – it could mean bigger savings down the road.

1. Shop

Before applying to a lender, shop around and compare the interest rates and terms of several lenders. All lenders have their own formulas for calculating your rate, so it’s important to get more than one quote.

In most cases, you can get pre-approved before submitting a full application and receive a quote with just a soft credit application, which won’t impact your credit score. Once you get pre-approved, you can select the best deal and complete the refinance process.

If there is no pre-approval option, keep your requests short. Multiple inquiries that appear on your credit report will be combined into one when calculating your credit score, provided they all occur within a short period of time, usually 14 days.

2. Consider fees

Before you refinance, consider whether the fees will impact your savings. Some car loans carry a prepayment penalty, which means that paying off your loan early may cost you more than you would save in interest. If so, refinancing your car loan won’t be worth it.

Some lenders also charge hefty origination fees when you take out a loan to refinance it. Like a prepayment penalty, it can erode potential savings and make refinancing more complicated than just staying with your current lender.

3. Understand how your credit will be impacted

Virtually every time you apply for credit, a thorough investigation will lower your credit score by a few points. If you then open a new loan account, it will reduce the average age of your accounts, which can also lower your credit score.

That said, both factors are much less important in calculating your credit score than your payment history – and making timely payments on your new loan will increase your score over time. So unless you’ve recently applied for another loan or don’t have a long credit history, refinancing is unlikely to make much of a difference.

4. Look for more lenders

When you first borrowed money to buy a car, it may have been through dealer-arranged financing. However, many banks, credit unions, and online lenders offer direct financing to car buyers and owners. Just make sure your current car and auto loan meet the lenders requirements. Most have maximums on vehicle mileage and age as well as a minimum amount you must borrow to qualify.

In general, it’s best to start with the financial institutions you already work with. In some cases, you may qualify for a loyalty discount based on your existing relationship with the bank or credit union.

But don’t stop there, even if the terms are excellent. Take the time to compare this quote with rate offers from other banks and lenders. This process can take some time, but the more options you compare, the more likely you are to get the best auto loan terms available to you.

When should I refinance my car loan?

There’s no better time to refinance your car loan – if it saves you money, now is a good time. There are a few situations where refinancing makes the most sense.

  • Refinance when auto rates have dropped. Most car loan interest rates fluctuate based on the prime rate and other factors. If you bought your car some time ago, auto loan rates may have since dropped.
  • You have improved your credit score. Even if market rates haven’t changed drastically, improving your credit score may be enough to get you a lower rate. If you have improved your credit score since signing your original loan, you may qualify for better loan terms.
  • You got your original loan from the dealership. Dealerships tend to charge higher rates than banks and credit unions to make a bigger profit. If you took out your original loan through dealership financing, refinancing with another lender might get you a lower rate.
  • You need lower monthly payments. In some cases, refinancing an auto loan can be your ticket to a more affordable payment, with or without a lower interest rate. If your budget is tight and you need to reduce your car payment, you can refinance your loan for a longer term. But even though your monthly payment will be lower, expect to pay more interest.

Requirements to refinance

Lenders determine eligibility differently. Before refinancing, check the requirements for you, your vehicle and your current loan.

  • A regular source of income, a low debt ratio and good credit are the basics. But a lender may also want to see proof of residency, such as a rental agreement, mortgage statement, or utility bill, to make sure they know where the car will be parked.
  • Lenders will want to know the make, model, year, vehicle identification number (VIN), and mileage of your car. This will help the lender determine the value of your car and whether it’s worth refinancing based on your loan amount.
  • Your current loan balance, monthly payment and repayment amount will help the lender determine how much you need to borrow and whether you meet the minimum loan requirements.

When refinancing doesn’t make sense

Refinancing your car loan is not always the right choice. If you are close to paying off your loan, refinancing may not save you money. Stick to it unless you desperately need to extend the term of your loan to lower your monthly payment.

Being upside down on the original loan will also make refinancing difficult. Lenders generally won’t approve you if you owe more on the car than it’s worth. This is also known as being “under water” on the loan – and it’s a tough place to get out.

If your car is older or has done several miles, lenders may not want to refinance. This generally looks like a vehicle that is 10 model years old or has over 100,000 miles, although specifics vary by lender.

Next steps

The main reason to consider refinancing is so you can qualify for a lower rate and save money in the long run. Technically, you can refinance your auto loan whenever you want, even shortly after purchasing the vehicle.

But depending on where you are on the repayment schedule, your actual savings will vary. Use a car loan refinance calculator to work out the numbers for your situation and see how much refinancing can save you.

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