What is auto loan refinancing?
Key takeaways
- Refinancing involves taking out a new auto loan, which pays off your existing loan.
- Through refinancing, you could secure a better interest rate and lower monthly payments.
- You might benefit from refinancing if you improved your credit score, found a lender with lower rates or have positive equity in your vehicle.
- Refinancing is not a good idea if you have an older or high-mileage vehicle, have a lower credit score or if the refinancing ends up costing you more.
If you’ve owned your car for a year or more, lenders may advertise better interest rates than you’re being charged. Lower interest rates offer the possibility of saving on your monthly payments. To get a lower rate, consider auto refinancing, which is getting a new loan for your car.
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 financing with a dealership, you may find better rates even without excellent credit.
How does refinancing a car work?
When you refinance your car, you take out a new auto loan to pay off an existing car loan. The new loan will likely come with a different interest rate and term. You will pay the new lender in fixed monthly installments as you did with the old lender.
Refinancing could reduce your interest rate, lower your monthly payments and enable you to pay off the debt quicker. However, this depends on your credit status and the rate you qualify for. Compare the pros and cons before refinancing.
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.
An auto loan refinance calculator can help you tell whether refinancing will save you money and how much you could save.
When is it a bad idea to refinance your auto loan?
Some circumstances could prevent you from refinancing or make it a bad 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’ll incur prepayment penalties for paying your loan off ahead of schedule that exceed potential savings.
- You’re upside-down on your loan.
- 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:The auto loan rate you receive will depend upon your score. A credit score over 670 is ideal.
- Compare rates: Prequalify with several lenders to save your credit from taking multiple hits.
- Apply online: You can do so over the phone or in person. Review the terms before signing.
- Pay off your current loan: Continue paying your existing loan until you verify it’s completely paid off. Any excess payments will be refunded.
The bottom line
Refinancing your auto loan may help you save money over the life of the loan. This option is worth considering if available car refinance rates are lower or your credit has improved.
But if lowering your monthly payments would require extending your loan term, you may want to look into refinancing alternatives. If you’re ready for a new vehicle, trading in your car is another option.
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Best auto loan refinance rates