Should You Refinance Your Car Loan During COVID-19?

The coronavirus pandemic has sent the U.S. economy — and household finances with it — into a tailspin. Despite the turmoil, it may be a good time to refinance your car loan, thanks to dropping interest rates. Refinancing a car loan could save you money, lessening your financial burden. We’ll also give you solutions if you’re having trouble making your car payment, which may include working with the lender you already have.

• Best refinance rates during COVID-19
• Is it possible to refinance your car during the crisis?
• When refinancing makes sense
• When refinancing does not make sense
• Other things to look out for in an auto refinance

Best refinance rates during COVID-19

Rates on auto loans and other types of consumer borrowing began to tumble when the Federal Reserve began a series of federal funds rate cuts in August 2019. When the Fed cuts rates, financial accounts’ rates typically drop, too.

In March, when the Fed cut rates to near zero in response to the coronavirus pandemic, consumer rates fell once again. Now, those with strong credit scores may be eligible for starting refinance rates once reserved for those buying new cars. Added good news is that you may not need the best credit to get them: lenders are extending top-tier rates to those who fall in the “good” range.

Here’s a sampling of some of the lowest auto refinance rates we see right now.

*May include auto pay discount. 

Keep in mind that in order to get the lowest rates, you’ll most likely need to have verifiable income and low debt to income. Lenders haven’t thrown the rule book out the window, and they’re still keeping an eye on consumers’ ability to repay loans. Data from the Federal Reserve Bank of New York shows that 90-plus day delinquency rates rose in the final quarter of 2019.

Compare rates. The best way to get your best deal is to apply directly with potential lenders — ideally more than one — including your own credit union, bank or online lender. You could fill out an online form at LendingTree and get up to five potential auto refinance offers from lenders in our partner network, depending on your creditworthiness.

Is it possible to refinance your car during the crisis?

Auto refinance lenders are accepting applications and issuing offers during the coronavirus pandemic. The most convenient way to apply for auto refinance during this time is online, as many banks and credit unions have closed their branches or restricted services to their ATMs or drive-thrus. Wait times by phone may be longer than usual, too.

If you’re hoping to refinance your auto loan with your current lender, that might be possible, but many do not refinance their own loans.

Pros and cons of refinancing your car loan during COVID-19

Pros

• Lower rates are now more accessible to people with a greater range of credit scores.
• Refinancing at a lower rate for the same term or a shorter term could reduce how much you pay in interest. You’ll get the biggest bang for your refinancing buck by selecting a shorter term.
• Securing a lower monthly car payment could free up your monthly budget and lessen stress.

Cons

• If you extend your car loan and it has the same or a greater APR, you would pay more in interest over the life of the loan.
• Vehicle values are in flux because of the coronavirus pandemic. If your car is suddenly worth less, the lender may see it as a riskier bet to refinance. We’ll talk more about this, below.

When refinancing makes sense

Low rates aren’t the only reason why it may be a good time to refinance your car loan — your own personal situation plays a role, too.

For example, “if your credit score has increased since the original loan, you will benefit even further as higher credit scores get lower interest rates,” said Tendayi Kapfidze, LendingTree’s chief economist.

The best times to refinance a car loan are when you have:

Improved your credit score. Auto loan interest rates are heavily based on credit scores. As we’ve mentioned, most auto loan lenders sort potential borrowers into tiers — if your credit score has improved since you took out your current auto loan, that could bump you into a higher tier with a lower interest rate. Check your credit score.

Positive equity in your car. A loan is less risky for a lender when the collateral is worth more than the loan amount. If you owe more on your car than it is worth, this is known as negative equity, or being “upside down” on your auto loan. Here’s how to get rightside up on your car loan.

Less debt to income. If you’ve lightened your monthly debts in a significant way, such as paying off a credit card, your debt-to-income ratio may look much more favorable to lenders considering you for an auto refinance loan. Income goes hand-in-hand. Maybe you got a promotion or a new job or side gig since taking out your original auto loan. This may have improved your ability to repay your debts.

Refinancing to lower your payment

The other time when an auto loan refinance makes sense is when you just need a lower payment. We typically don’t recommend extending your car loan, as the ideal car refinancing scenario involves shortening your loan term to lower your overall interest. However, doing so could be a way to make ends meet when times are tight. Use our auto refinance calculator before signing.

When refinancing does not make sense

If you want to refinance because you lost a job, be aware that the lender will verify your income and employment status. It does not make sense to refinance a loan that you can’t pay with another loan that you also can’t pay. If you’re having trouble making your payments, talk to your lender. Many are offering COVID-19 relief programs, which include waiving late fees and providing deferrals. If you’re having trouble making mortgage payments or paying other bills, there are resources for that, too.

A refinance might not make sense if your car dropped in value. Fewer people are buying vehicles during the COVID-19 pandemic, which is driving down car prices. While industry sources haven’t released any guides on how far prices are falling, during the 2008 recession, used car prices fell 10%, according to Edmunds. How does this affect auto refinancing? Your car may be worth less than you thought, which can affect the amount of equity you have in the vehicle and the loan-to-value ratio. 

What if I have reduced income? If your hours have been cut, you may still be able to refinance. The biggest challenge is that your reduced income likely means the lender will judge that your ability to repay the loan is also reduced and it may charge you a higher APR than it would have if you retained normal hours.

What if I’m worried about future income? If you’re uncertain about what the future holds regarding job stability and income, an auto loan refinance that reduces your monthly payment could be one way to put more cash into savings and reduce monthly debt expenses so you might not face as much of a financial strain if something happens. Refinancing now, before you have reduced income, could also play in your favor.

Alternatives to refinancing a car could include selling a car you can no longer afford and finding a cheaper one.

Other things to look out for in an auto refinance

While the steps of refinancing a car are typically straightforward, here are some other elements that could affect your bottom line.

Consider add-ons carefully. When you refinance your auto loan, the lender may offer you add-ons such as an extended warranty, GAP insurance and a service contract. You should not have to buy any of them in order to refinance.

Look at autopay options. Automatic car payments can not only be super convenient and save your credit score from a ding due to a moment of forgetfulness, they can also qualify you for a lower rate. Some lenders like PNC Bank and LightStream offer auto loan rate discounts if borrowers select automatic loan payments.