Looking to lower your car payment and free up money in your budget, but negotiating with your lender hasn’t worked? Or maybe you want to pay less interest on your loan? Refinancing your car loan may help.
Refinancing isn’t a decision to make lightly. So read on to learn everything you need to know about refinancing your car loan.
How Does Refinancing a Car Loan Work?
Refinancing your car loan works by getting a new car loan – usually with a different interest rate, monthly payment or repayment period – that pays off your old car loan. You then make payments on your new loan with your new lender.
Now that you know what it is, let’s break down how to refinance a car loan.
Evaluate your situation
First, find out if you’ve waited long enough after getting your original loan to refinance. Generally, you should wait to refinance your car loan until you’ve been making loan payments for at least 6 – 12 months.
Then, if enough time has passed since you got your original loan, check your:
- Current loan balance: If you still have a high balance left on your loan, you may be able to save money by refinancing.
- Car value estimate: If your car is worth more than you owe on your loan, a lender may be more likely to give you better terms. Learn your car’s value by looking at sites like Kelley Blue Book or Edmunds.
- Credit scores: Check your credit scores and get your free credit reports to see where you stand. The higher your credit scores, the more likely you’ll qualify for a refinance loan with better terms.
- Loan agreement: Look for prepayment penalties in your current loan agreement (since a refinance pays off your original loan). This fee could negate savings you get from refinancing.
To speed up the process, get all of your information together before applying for the loan. The documents you’ll need for refinancing include:
- Driver’s license
- Proof of insurance
- Proof of income
- Social Security number
- Current auto loan information
- Vehicle information (like the vehicle identification number (VIN) and mileage)
Compare lenders’ offers
Shop around for the best offers and interest rates to help you save money and see which loans you qualify for. Look at online lenders, banks and credit unions.
Get prequalified (a basic financial check) for an idea of the loan terms and loan amount a lender may extend to you. This usually involves a soft credit pull that won’t hurt your credit scores.
Or apply for preapproval – which is a more thorough process and involves a hard credit inquiry. Preapproval gives you a better estimate than prequalification, but it doesn’t guarantee loan approval.
A hard credit inquiry can cause a slight drop in your credit scores. If you’re submitting more than one application, submit them all within a 14 day window. This ensures the credit inquiries are counted as one credit pull on your credit reports – minimizing the negative impact on your scores.
Apply for financing
Once you’ve found the loan you want, submit your application.
The approval process can be quick, sometimes taking as little as 24 hours. If approved, you’ll go over terms with the lender and sign the loan agreement. Your new lender may pay off your old loan directly or send you the money to do so.
What Are the Benefits and Drawbacks of Refinancing Your Car Loan?
A good reason to refinance is when you can save money in the long run. But there are benefits and drawbacks to refinancing your auto loan. Let’s take a look:
PROS of Refinancing Your Car Loan👍
You can get a lower monthly payment by getting a better interest rate than your existing loan or extending your repayment period. Either can help make monthly payments more affordable.
You can save money by getting a loan with a lower interest rate and keeping your loan repayment period the same.
CONS of Refinancing Your Car Loan👎
Extending your repayment period, even with a lower interest rate, can mean paying more money over time than if you’d stuck with your original loan.
Cars depreciate (lose value) over time. If you extend your repayment period for too long, you could end up owing more than your car’s worth.
You could end up paying more out-of-pocket costs if your old loan has prepayment fees or your new loan comes with refinancing fees. These could negate any savings from refinancing.
When Should You Refinance Your Car Loan?
Deciding when to refinance can be tricky, but there are some instances when you should consider refinancing your car loan, including when interest rates have dropped or your financial situation has improved since you got your original loan.
Refinance your car loan if:
This may help you save money over the life of the loan and can lower your monthly car payment.
You’re more likely to get better loan terms if you have a higher credit score, earn more money or have a lower debt-to-income (DTI) ratio than when you got your original car loan.
Refinancing can lower your monthly car payments with a lower interest rate or extended repayment period. Just remember, a longer repayment period can mean paying more interest in the long run.
When Is Refinancing Not a Good Idea?
It may not always be in your best interest to refinance your auto loan. Here are some of the reasons to wait on refinancing:
Hold off on refinancing your car loan if:
Old age or high mileage can decrease a car’s value. If your car is worth less than what you owe, you may not get the best refinance loan terms or qualify at all.
Car loans are usually amortized, meaning most of your interest is paid off toward the beginning of the loan. If you’re close to paying off your current car loan, the less you’ll save on interest by refinancing.
Refinancing may not make sense if you’re paying more in fees than what you’d be saving.
If you’re looking to apply for other credit in the near future, like a mortgage, you may want to rethink refinancing. Applying for an auto loan refinance can negatively impact your credit, which can hurt your chances of being approved for a mortgage or getting favorable loan terms.
Is Refinancing a Car Loan Worth It?
Refinancing a car loan can be worth it if it allows you to save money on interest and lowers your monthly payments. But depending on the economy, current interest rates and your financial situation, refinancing might not be wise.
Here are some final thoughts to consider before refinancing a car loan:
- Estimate your savings: Estimate how much you’ll pay in refinancing fees and use an auto refinance calculator to see how much you could save with your new loan to ensure fees don’t outweigh savings.
- Find the right timing: If your credit scores are high, interest rates are low, you still owe a fair amount on your current loan, your car is worth more than what you owe and the refinance fees don’t outweigh what you could save, it could be the right time. Any combination of these factors can work; you don’t have to check every box.
Find the Right Time to Refi
Refinancing your auto loan can be a great way to save money – if the timing is right. Getting a lower interest rate or extending your repayment period can help make your monthly payments more affordable. Just remember that extending your repayment period can mean paying more interest over the life of the loan.
If you’ve decided refinancing makes sense for you, shop around and get the best interest rate and terms so you can and continue making on-time payments.