What is auto loan (re)financing?
If you’ve owned your car for a year or more, lenders may be advertising better interest rates than what you’re being charged. Lower interest rates offer the possibility of saving money on your monthly payments. To secure a lower rate, consider auto refinancing — essentially, getting a new loan for your car.
Before refinancing a car loan, it’s important to understand the process and compare rates before applying.
Refinancing could be a good option if you have good credit — especially if your credit has improved since you first took out the loan. If you have a poor interest rate due to originally financing with a dealership, you may also benefit from improved rates, even without excellent credit.
What does refinancing a car mean?
When you refinance your car, you’re taking out a new auto loan to pay off an existing car loan. It could reduce your interest rate, lower your monthly payments and enable you to pay off the debt quicker. But this all depends on your credit status and the amount and rate you qualify for.
How to save money with your auto loan refinance
There are a few ways to save money when you refinance your auto loan.
Lower your interest rate
Depending on your credit score and equity in your vehicle, you might get a lower interest rate with a new lender. With a lower interest rate, the cost of borrowing money will be less over the life of the loan. This could save you hundreds or thousands of dollars.
Lower your monthly payments
Refinancing your auto loan may lower your monthly payments. You could reduce your payments with a better interest rate or by extending the loan term. However, if you increase the loan’s length, its overall cost may increase because you’ll pay more in interest.
When is it a good idea to refinance your auto loan?
Refinancing your auto loan may be a good idea if one of the following is true of you:
- Your monthly payment is too expensive
- Your credit score has improved since you received your loan
- You financed through a dealership and see other lenders offering better rates
- Your vehicle has positive equity
Some circumstances could prevent you from refinancing an auto loan, or mean doing so may not be the best option. You may want to hold off if:
- Your car’s mileage exceeds 100,000, the vehicle is over 10 years of age or you fail to meet other refinancing requirements.
- You’re upside-down on your loan.
- You’ll incur prepayment penalties for paying your loan off ahead of schedule.
- You’re almost done paying off the loan, and refinancing means you’ll pay more in interest.
- You’ve already refinanced your car loan recently.
- Your credit score is too low to qualify.
- You’ll get a higher rate if you refinance due to rising market rates or other factors.
How to refinance your car loan
Understanding the process of auto loan refinancing is just as important as knowing the benefits. Here are four steps to follow when refinancing a car loan.
- Check your credit score and report. The auto loan rate you receive will depend upon your score. A credit score over 670 is ideal.
- Compare rates and prequalify with several lenders to save your credit from taking multiple hits.
- Apply online, over the phone or in person and review the terms before signing.
- Use the funds from your new car loan to pay off your current loan, but continue making payments on your existing loan until you verify that it’s completely paid off.
The bottom line
Refinancing your auto loan may help you save money over the life of the loan. This option is worth considering if interest rates are lower or your credit has improved. But if lowering your monthly payments through refinancing would require extending your loan term, you may want to look into refinancing alternatives.