If you bought a car recently, there was likely a lot to think about. It’s possible you gave more attention to the details of the vehicle you’d be driving rather than the loan you now have. If you’re feeling iffy about your car loan and wondering if there’s potential to lower your monthly loan payment, you might want to consider refinancing.
Refinancing an auto loan means you take out a new loan to pay off the balance of the existing loan. For example, if you financed a car at a dealership at a higher interest rate than what your financial institution is offering, refinancing your car loan with a new loan at your financial institution could get you a lower interest rate and lower payments.
Refinancing your car loan can save you money, but the circumstances need to be right.
Interest rates have dropped. If interest rates have gone down, it’s a great reason to refinance. If you can refinance at a lower rate, your monthly payment could decrease. Another option is to refinance at a lower rate, but keep the same monthly payment amount, which will allow you to pay off your loan faster and save on interest over the long term.
You find lower interest rates than where you originally financed your loan. If you financed your vehicle with a dealer or bank, you might find better loan rates at a credit union and could save money compared to your current loan.
Your credit score has improved. If your credit score was on the lower side or if you needed a co-signer when you took out your initial auto loan, you may qualify for a better interest rate if your credit score is higher now.
It could help your financial situation. If your current monthly payment is straining your budget, refinancing to a lower rate and/or a longer term could make your monthly payment more manageable. It’s important to note that a longer term will stretch the length of the loan, and you will likely pay more in interest in the long run. Avoid a longer loan term that could put you “underwater,” or owing more than the car’s value (learn more below).
You’re in the later stages of your loan. Most of the interest on a car loan is paid during the first half of the loan, so it’s typically better to refinance toward the beginning of the loan term.
Your loan has a prepayment penalty. If your current loan has a prepayment or early termination penalty, you’ll need to check if it will cost extra to pay off the existing loan early over the cost of refinancing to a lower rate.
Your car is older or has high mileage. If your car is older than 7 years or has more than 75,000 miles, some lenders may not refinance your loan.
You owe more than the car’s value. Also known as being “upside-down” or “underwater,” it means the amount left on your car loan is more than your car’s value. Lenders typically avoid refinancing this situation.
Meeting with a lending professional or using an online refinancing calculator can help you determine if refinancing your auto loan is an option that works in your favor. It’s also important to time your refinance so you don’t miss a payment on your existing loan, which could hurt your credit score or ability to refinance. Whether your goal is a lower monthly payment or paying off your loan faster at a lower interest rate, looking at the loan details carefully can help you make a smart decision.