Should I Refinance My Car Loan? The Top 7 Reasons To Do It

If you are paying off an auto loan, the monthly payment might be taking a big bite out of your monthly budget. The draw of locking in a lower interest rate and more manageable monthly payment is undeniably attractive. The catch is that your new loan might come with hidden costs or a longer loan term.

It’s critical to consider all aspects of this complex financial decision before moving forward. Luckily for you, we break down the top reasons to refinance your auto loan below.

7 Reasons You Should Refinance Your Car Loan

While refinancing a car loan is the right move for some, it’s not the right move for everyone. As you weigh your options, the following reasons might make refinancing the right move.

1.   Interest Rates Have Improved

Interest rates are always fluctuating depending on the market. If rates are currently lower than they were when you applied for your original loan, you could save enough money on interest over the life of the loan to make an auto loan refinance worthwhile.

You can check on what the current interest rates are for auto loans to see where auto loan rates stand.

2.   Your Credit Score Has Improved

Responsible credit management habits can help you grow your credit score over time. For example, building a positive payment history with your current auto loan adds good information to your credit report, which could push your credit score higher.

For borrowers who see an improved credit score, lower interest rates might be within reach. If you are locked in your current loan that you applied for with bad credit, you might be paying a higher interest rate than you need to. A new loan could help you reap the benefits of your responsible credit use.

3.   Your Financial Situation Has Improved

A higher income or a shift in your financial priorities could set the stage for refinancing your car loan. When you apply for a loan, lenders look at many aspects of your financial situation. If you are bringing in a higher income, it might lead to more loan options.

For example, a higher income likely means you can afford your car payment more comfortably. Some lenders, like your credit union, might be willing to extend more favorable repayment terms to account for the lower risk.

4.   You Need To Cut Your Monthly Budget

If your monthly spending is too high, refinancing your auto loan could help. For many, the pinch of monthly car payments puts too much pressure on their wallet.

It’s possible to tap into lower payments by refinancing an auto loan to lock in a better interest rate or longer loan term, which could both lead to a lower monthly payment. If spending less money each month is a priority, refinancing might be the solution.

5.   You Don’t Like Your Current Lender

Not all lenders offer equal deals. As you learn more about auto loans, you might realize that you didn’t lock in the best offer when you purchased your vehicle. That’s especially true if you chose to work with the first bank that offered you an auto loan or got dealer-arranged financing.

If you realize that your old loan isn’t the best option for you, then it’s time to consider working with a new lender.

6.   You Want To Shorten Your Loan Term

If you are interested in paying off your car loan faster, refinancing into a shorter loan term can compress the timeline. Depending on the situation, this choice could lead to a higher monthly car payment. However, that’s not always the case, especially if interest rates have dropped.

Not only will this choice help you get out of debt faster, but you might also pay less in interest over the life of the loan.

7.   You Financed Through A Dealership

When purchasing a vehicle, financing the purchase through a dealership can feel like the right move. However, most dealerships offer loans with high interest rates.

If you have a good credit history, you can likely lock in a lower interest rate through a financial institution or online lender. It’s worth taking a quick look to see if you can find competitive rates that offer a substantial savings opportunity.

4 Reasons To Keep Your Current Auto Loan

Of course, refinancing your current auto loan isn’t always the right choice. Below are some reasons why you might want to keep your current auto loan.

1.   Your Car Is Less Than 6 Months Old

It usually makes more sense to wait at least 6 months before shopping for a new loan. Otherwise, you likely won’t find significantly better interest rates.

2.   You’re Upside Down

If you own a car that is worth less than what you owe, you’re upside down on the car loan. When you refinance, the lender will be very interested in the value of your car. After all, the vehicle itself is collateral for the loan. If you are upside down on the loan, it can be difficult to get financing for the loan amount you need.

3.   Prepayment Penalties And Other Fees Are Too High

It’s important to scope out the fees before moving forward with a refinance. A few of the costs you might encounter include finance charges, prepayment penalties and origination fees. Take the time to add up these costs. In some cases, the cost of refinancing might be too high to make sense.

4.   You’re Worried About Hard Inquiries Hurting Your Credit Score

A loan application triggers a hard credit inquiry. Hard inquiries can have a negative impact on your credit score.

While the negative impact is usually temporary, it could be a concern if you are planning to apply for a big loan in the near future. For example, if you are applying for a mortgage this month, you might want to hold off on refinancing your auto loan until after the paperwork is finalized.

How To Refinance A Car Loan

If you are ready to refinance a car loan, the first step is to determine your goals for the auto loan refinancing process. For example, you might have the goal of a short loan term, smaller monthly payment, or lower interest rate.

Once you are clear on your goals, you can shop around for loans that meet your requirements. For most borrowers, locking in a lower interest rate than their existing loan is a top priority. But don’t forget to take the lender’s fees into account before applying for a new loan.

FAQs: When To Consider Refinancing Your Car Loan

You have questions about refinancing your car loan. We have answers.

When should I refinance my car?

You can technically refinance your auto loan as soon as you drive off the lot. There is no minimum amount of time you have to wait before refinancing. In fact, because borrowers pay more interest upfront, you’re likely to save more if you refinance sooner rather than later. But, it’s recommended you wait at least 6 months before you refinance, to hopefully get more value out of it.

Is refinancing a car worth it?

Refinancing a car loan can be worth it. But the answer depends on your unique situation. Run the numbers before refinancing to confirm you are making the most efficient decision.

What are the disadvantages of refinancing a car?

A major disadvantage of refinancing a car is the time required to obtain new financing. You’ll need to shop around, submit an application, and finalize the paperwork to get to the finish line.

Does refinancing a car hurt my credit?

If you’re borrowing, you needn’t worry that rate shopping will hurt your credit too dramatically. As long as you keep all your hard inquiries within a 14-day period, they’ll only temporarily impact your credit score as a single inquiry.

The Bottom Line: You Can Refinance A Car Loan To Help Your Finances

Refinancing your auto loan could help you find some breathing room in your monthly budget and accelerate progress toward your financial goals. But it’s important to run the numbers before jumping into a new loan option.

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