How Do I Refinance My Car?
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How Do I Refinance My Car?

By Autolist Editorial | February 13, 2021

You probably know that refinancing a mortgage is a common way to save some money. But did you also know that it's possible to refinance a car loan? It's less common than a mortgage refinance, but it can potentially save you money and lower your payments.

But when does refinancing a car make sense? Unlike refinancing a house, the main objective is not getting equity out of the car, but for the borrower to get better loan terms and a lower monthly payment, and save money in the process.

Let's take a look at how refinancing a car works and how to do it.

Why Should You Refinance Your Auto Loan?

There are a number of reasons why you might be a great candidate for an auto refinance loan. The biggest reason is saving money. TransUnion reports that many car owners can get a lower interest rate by about 2.4 percent and a monthly payment that's at least $50 lower than what they have on their existing loan.

There's also no shortage of car loan companies offering to refinance. About two-thirds of these companies have refinance options, but many car owners don't realize this service is available.

Improve Your Terms

Sometimes you might not get the best terms when you finance a car the first time. Maybe it's due to your own credit score at the time, or if you bought a car impulsively, or perhaps you were too focused on the monthly payment and forgot about the total interest on the loan and the length of the loan.

If you had bad or hard credit initially, it's also possible to get into better loan terms with more competitive rates after you can show a history of on-time payments.

Whatever your situation, if you find out later that your initial interest rate is higher than what's currently being offered, you might consider shopping for a new loan.

Manufacturer Incentives

Another reason you might end up with a high interest rate on your auto loan is if you opted for higher interest in order to take advantage of a cashback offer from the manufacturer on a certain model year of vehicle.

Automakers sometimes give you the choice of a low-interest rate or a certain amount of cashback. If you take the cashback offer, you might be left with a loan that has a high-interest rate. Sometimes you can turn these loans around almost immediately for a better financing deal; other deals will require you to stick with them for a certain amount of time before refinancing.

Moving To Your Own Bank

The other reason you might want to refinance your current loan is to move it to the bank or credit union where you do most of your business. This offers several benefits, including possibly giving you discounts as well as make it easier to sync up your accounts.

For example, many people get direct deposit of their paychecks into a savings or checking account, and you can potentially allocate specific amounts of money to the loan if it's in the same place.

Change Your Loan Length

Let's say your monthly loan payments are currently stretching your budget further than you would like. If your original loan amount could only be stretched by a year or so, it would reduce your monthly payment amount without necessarily incurring any additional interest charges.

Refinancing your loan into one that has a longer term gives you this possibility; a lower interest rate can offset any additional interest you would pay on a longer loan term, and the longer length of your loan effectively reduces your monthly payments over the life of your loan.

Credit Score Increase

As previously mentioned, you might have had to take a high-interest rate on your loan because of your bad credit score when you originally financed your car. Sometimes high-interest loans are the only way to get financing when you have poor credit or no credit.

However, much like a credit card, once you start making on-time payments on your vehicle loan, you're likely to see your score go up. This improved credit score might qualify you for a better deal on financing. Refinancing thanks to good credit in this situation can potentially save you a lot of money and help you get the lowest rate possible.

How To Start Your Auto Loan Refinancing

The auto loan refinance process is similar to what you did to get your current auto loan. Start by making sure that your loan can be refinanced, i.e. check if it has any prepayment penalties.

Once you know that it can be refinanced, you can start looking for lenders to refinance with.

The next step is to fill out an application. Whether you apply at an online lender or in-person at your bank or credit union, you will need to fill out an application. The application is likely to be very similar to what you filled out for your current lender.

Credit Score Importance

Aside from your debt and income, your credit score is still the most important number to lenders. Equifax, Experian, and TransUnion are the three main credit bureaus, and they score slightly differently.

It's always a good idea to know your own credit score and credit history before applying for a loan.

Comparing Auto Loans

Low-interest rates and low monthly payments aren't enough to compare auto refinancing terms. It's important to look at the whole loan picture, which includes fees, interest, and the loan term.

Use a refinance calculator to put in the loan amount, interest rate, and length to find out your monthly payment. Then you multiply the monthly payment by the length of the loan to find out the total cost over the life of the loan.

For example, if you have a loan payment of $400 per month, you would multiply that by the length of the loan in months. Let's say your loan length is five years or 60 months. That means your total loan cost would be $24,000.

Remember that the longer you stretch your loan term out, the more you'll end up paying in the end. A good rule of thumb is to get the shortest term that you can afford with regards to the monthly payments.

Where To Refinance?

Most of the same places that do initial financing also do refinancing.

The only place you should generally avoid for a replacement auto loan is a car dealership. Dealerships usually act as third parties and mark up their financing deals. This isn't usually a problem for initial financing, but if you want to get the best refinance rates, it's not the right place to do it.

Credit unions tend to refinance the majority of auto loans. They provide lower rates to their members vs. what other financial institutions can offer.

Another option is to approach your current lender for a refinance. They might be motivated to keep you from leaving and offer you a better annual percentage rate.

When Not To Refinance

Now that you know the good reasons to refinance, and how to refinance, it's time to look at reasons not to refinance. There are some situations where refinancing doesn't make much financial sense.

One of the biggest reasons is if there's a prepayment penalty on your loan. Sometimes this is a crucial issue that the lender has put into the loan terms precisely to keep you from refinancing.

Another reason is if you have bad credit. If you've missed any monthly car payments since obtaining your initial auto loan, your credit report might reflect that.

If your car is nearly paid off, then there's not much point in refinancing as the fees will counter any savings you might get. If you're underwater on your current loan, it will be much harder to get a decent refinancing deal as lenders often charge a higher interest rate when you have a loan-to-value rate over 100 percent.

If you decide to refinance a loan, then it's important to ensure that the new loan proceeds get transferred over to the old loan. Your new auto lender might assure you that this will happen in a timely manner, but it's your responsibility to make sure the repayment happens.