Auto LoansAuto Refinance

When to Refinance a Car (and When to Wait)

Figuring out when and if you should refinance a car can be tricky, but if you approach it the right way, and ask the right questions, you’ll be able to make the right choice. You should refinance a car when it could help you save money, get a lower payment or both. You should probably skip refinancing if you’re underwater on your current loan, you bought the car recently or your current loan has prepayment penalties. Here’s more on when to refinance a car and when to wait.

When you should refinance your car

There are a few situations where you should refinance your car and as Natalie Brown, communications manager with Wells Fargo said, “We encourage consumers to consider the short-term and long-term impacts of refinancing.” That means looking closely at your finances and understanding the details of the new loan you’re signing up for. Here’s when you should refinance your car loan.

Your credit score has improved

Your credit score is very important in car finance as auto lenders sort applications by credit tiers. Both the APR you get and whether you even receive an offer are largely determined by the credit tier you are in. If your credit score improved since you initially purchased the vehicle and you moved up a tier, then it’s likely you’ll qualify for a better financing deal. Here’s how you could improve your credit score.

Getting a better APR could save you quite a bit in interest over the life of your loan. For example, refinancing $15,000 from a 7% rate to 5% when making a monthly payment of a couple of hundred dollars would save you around $800 in interest.

Here is how much you would pay in interest over the life of a 6-year loan if you borrowed $25,000, based on the APRs for closed auto loans by credit score on the LendingTree platform in May 2020.

How Credit Score, APR and Interest Charge Relate
Credit Score Average APR Interest Charge
720 or higher 6.62% $5,361
680-719 7.13% $5,801
660-679 8.57% $7,063
640-659 11.47% $9,696
620-639 13.32% $11,438
580-619 15.02% $13,081
560-579 17.44% $15,486
Less than 560 20.85% $19,007

You want to change the loan term

Brown says that it also makes sense to refinance your car loan when you need a lower monthly payment.  You could extend the length of the loan on your car refinance to get a lower payment. It’s important to note that extending the length of your loan, which is known as the loan term, reduces your payment but increases the amount of interest you’ll pay over time. And it works the other way, too. Reduce the term, and your monthly payment will increase while the amount of interest you pay overall will fall.

A longer term can mean a higher interest charge. For example, extending a $15,000 auto loan from 48 months to 60 months will drop your payment close to $60 per month but you would pay an additional $589 in interest over the life of the loan.

Loan rates are down

If U.S. consumer loan rates have dropped since you took out the auto loan, you may qualify for a better APR. For example, in March 2020, the Federal Reserve cut consumer loan rates to 0%-0.25%. Auto loan rates correspondingly went down as well.  A small change in rates can save you money on interest.

You have positive equity

You may get a better auto refinance rate if your car is worth more than what you owe on it. To discover your loan-to-value ratio, contact your current lender, find out how much you owe and then divide it by your car’s value.

You hate your current lender

Many people choose to refinance simply because they don’t like the way their current lender does business. Rude customer service reps or poor record keeping can really sour a relationship with a lender. If you really can’t stand your current lender, refinancing with a new lender may help alleviate some of your frustrations.

Don’t automatically say yes to car refinance add-ons. Auto refinance companies like to sell extended warranties by telling a potential customer that their new payment with a warranty is $50 less than their current payment. What they don’t say is that the warranty costs $2,000. Don’t buy add-ons like this as well as auto GAP insurance without asking how much these products cost in total, and doing some research. GAP stands for guaranteed asset protection or guaranteed auto protection.

When you shouldn’t refinance your car

Here are a few situations when it would be unwise to consider refinancing your auto loan.

You have an older car

If you have a car that’s 10 years old or more, you may have difficulties finding a lender willing to refinance. Many lenders set limits on how old a vehicle must be in order to qualify for the loan. If you find yourself in a situation where you must refinance, consider taking out a personal loan or trading in the vehicle as alternative options.

You’re underwater on your loan

Finding a lender to refinance a vehicle when you’re upside down on your loan isn’t easy. Even if you can find a lender, it may not be the best move.

“It really isn’t a good idea to refinance when you’re upside down,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling (NFCC). “Because a portion of the loan is above and beyond the collateral, there is significant risk to the lender.” This means that if you do find a refinance offer for your underwater car loan, the interest rate is likely to be much higher than average, and it will cost you more in the long run.

When you refinance your upside-down vehicle, you add to the overall cost of the vehicle. One way around this is to pay the difference in cash so you’re no longer upside down, then you can refinance at a lower rate. Even if it takes you a few months of making a few extra payments, it may be worth it in the long run. Alternatively, you could also take out other financing, like a personal loan or home equity loan to help you cover the full cost of refinancing.

You bought the car less than 6 months ago

While technically you could refinance your car as soon as you buy it, it’s best to wait at least six months to a year to give your credit score time to recover after taking out the first car loan, build up a payment history and catch up on any depreciation that occurred when you purchased.

This is especially true if you bought the car new. McClary said, ”The new car you just purchased is now a used car, even though it’s only two months old. So the [new] loan you get will typically have a higher interest rate, because you’re getting a used car loan.” Unless there are other reasons to refinance, it’s unlikely you’ll get a lower rate than what you currently have.

McClary emphasizes the importance of making sure you can afford a new car before you make the initial purchase. “If you have any doubt about your ability to pay,” he said, “you’re better off not making the purchase and looking for other alternatives.”

Your loan has prepayment penalties

Some auto lenders charge penalties for paying off the loan early; but most do not. If your current auto loan comes with prepayment penalties, usually noted in the fine print, then you’ll want to do some math to determine if refinancing is a good deal after you pay the penalties.

Is refinancing worth it?

If you’re simply refinancing, and you know you’ll get a better rate and save yourself some money, it’s really a no-brainer. If you’re not sure if you’ll save any money, use this auto refinance calculator to estimate your savings and decide if it makes good financial sense to refinance

In many cases, people refinance because they need to lower their monthly payment, usually due to some unforeseen financial crisis. Finding balance between your immediate financial needs and long-term financial health is never easy, but if you do the math and plan accordingly you can make the right financial decision for you and your family.

If refinancing your vehicle is necessary to improve your cash flow, you may refinance now to get back into a positive financial situation. Once your personal finances have stabilized, start making extra payments on your auto loan to pay it down faster, provided that there aren’t prepayment penalties on your new loan. You’ll pay your auto loan off sooner and save yourself some interest expense.

Speak to a credit counselor

If you’re not sure refinancing your auto loan is the right move, you may want to seek professional help, like talking to a certified counselor with the National Foundation for Credit Counseling (NFCC). The NFCC is the largest nonprofit financial counseling service in the U.S. and they help people get financial control over their lives. They offer debt and credit counseling for free or at a minimal charge, and can help you figure out if refinancing is right for you. Even though an auto loan can’t be included in a debt settlement plan, there is still a benefit to talking with a credit counselor if you’re having trouble making payments. A nonprofit credit counselor could provide solutions that you may not be able to find on your own. You can use the NFCC locator to find a credit counselor in your area.

Next steps: How to refinance a car loan

When it comes time to actually refinance your loan, there are some steps you’ll need to take. These include gathering your documentation, doing some comparison loan shopping, choosing a lender, applying, then paying off your old loan and making payments to your new lender. Here are seven steps you can take to refinance your car.

When you are shopping around, make sure you don’t go with the first offer you’re presented with either. Take your time and request quotes from multiple lenders. Compare the APR, term, payment amount, fees and penalties (be sure to read the fine print) from each lender to find the best offer. Once you make a choice, the lender will guide you through the exact process and what comes next.


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