Can You Refinance a Car Loan?

An auto loan is a contractual agreement, where you’re locked in for the duration of the loan period and agree to make a certain payment each month. However, it’s possible to get out of an auto loan through a process called refinancing.

When you refinance an auto loan, you essentially swap your current loan for a new one. Refinancing can help you secure a lower interest rate, a more affordable monthly payment, or a different repayment period.

Refinancing an auto loan can be a great option for some borrowers, but it all depends on your situation. In this guide to auto loan refinancing, we’ll explain when it makes sense to refinance and when it doesn’t, and help you figure out if refinancing is the right choice for you.

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Reasons to Refinance a Car Loan

There are many reasons why car owners refinance their debt. Whether you’re looking for a lower payment or a longer term, you can accomplish both with a new loan. Here are a few situations where this strategy might make sense:

Interest Rates Are Low

Car loan interest rates are constantly fluctuating. If rates have come down since you took out the loan, you may want to consider refinancing, which could help you pay less money over time. For example, if your original $36,000 auto loan came with a 7 percent interest rate, even at just one point lower, you could save $1,012 over 60 months.

Your Credit Score Has Improved

Lenders use a variety of factors to calculate your auto loan interest rate, including your credit score. If your credit score has improved since the loan origination date, refinancing might help you get more favorable loan terms, which could reduce your monthly payments.

The Dealer Wrote Your Loan

If you financed your car with the dealership where you bought it, you might be paying more than necessary. Some of these companies charge a higher interest rate than typical banks or online lenders and then pocket the profit. Refinancing your dealer-arranged loan with a different lender could help you save money.

Your First Offer Wasn’t Great

Buying a car can be a very exciting experience, but it can also overshadow important parts of the purchase process, like choosing a good loan. If you accepted the first loan offer that the bank offered, it might be worth shopping around for better terms, even if your financial situation and the market haven’t changed.

You Need Lower Monthly Payments

Many car owners refinance their loans to get a more affordable payment. If your monthly budget is tight and reducing your car’s monthly payment will help significantly, refinancing can help you out. Just expect to pay more overall if you extend it past your original loan’s maturity date.

When to Avoid Refinancing

Refinancing your vehicle’s original loan isn’t always a good choice. Here are a few situations where refinancing may not be worth it:

You’re Close to Your Payoff Date

If you are close to paying off your loan, refinancing probably isn’t a great idea. Because banks front-load interest, you’ll pay most of these expenses in the beginning. The longer you wait to refinance, the less money you’ll save. It may be a better financial decision to just stick with your current lender and make your monthly payments until you settle it in full.

The Original Loan is “Upside-Down”

Being upside-down on your original loan means that you owe more money to the bank than your car is worth. It’s also called negative equity, and it means that you may have a difficult time refinancing. Because your vehicle is collateral, most lenders won’t approve a loan in excess of its actual market value. The only way to reverse negative equity is to make a large lump sum payment, which reduces your loan balance.

Your Car Is Too Old

Most lenders will not refinance a loan if your car is too old or has high mileage. For example, if your car is more than 10 years old or if it has an odometer reading over 100,000 miles, you may have trouble finding a lender that’s willing to refinance.

The requirements vary based on the financial institution, so ask your agent what their requirements are to see if refinancing is still an option for you.

Interest Rates Are Rising

If interest rates are on the rise, you may want to wait before you refinance your debt. You might not be able to find a lender that can offer you a lower interest rate than you’re currently paying. In that case, refinancing your loan doesn’t make sense, even if your financial situation has improved.

The Costs Outweigh the Benefits

Refinancing usually isn’t free, so it’s essential to research potential expenses, like prepayment penalties. Your bank may charge you a hefty sum for paying off your current auto loan earlier than anticipated. Depending on how your lender wrote the contract, you may even get stuck with a bill for the entire interest amount at maturity.

You Need Credit in the Near Future

Refinancing your auto loan will probably cause your credit score to temporarily drop. Therefore, it may not be a good move if you’re considering another large purchase. For example, if you plan on applying for a mortgage soon, you might want to hold off on refinancing your car loan so your credit score will remain as high as possible.

Can You Refinance a Car Loan at Any Time?

Every lender has different requirements around when you can refinance an auto loan. Many banks won’t accept an application to refinance if you just opened your existing auto loan in the last few months. However, you may find other financial institutions that allow you to refinance at any time.

There’s no best time to refinance your debt. If you can save money by getting a different loan, you should start the process. Just remember that most lenders do have requirements for when you can no longer apply for refinancing.

Who is Eligible to Refinance an Auto Loan?

Each lender has its own eligibility requirements for refinancing. However, there are several common factors. Before you submit your application, talk to your lender to learn more about their specific criteria. You’ll want to ensure you meet basic loan eligibility requirements to refinance your current loan, which usually include:

• Regular source of income
• Low debt-to-income ratio
• Good credit score (minimum of 670)
• Proof of residence (lease agreement, mortgage statement, or utility bill)

Tips to Follow When Refinancing Your Car Loan

If you can potentially save money on your auto loan, it’s a good idea to consider refinancing. Here are some tips to keep in mind as you make the decision:

Shop Around

Before you agree to a new loan, spend some time shopping around. You will want to get a few preapproval letters to compare interest rates and terms from multiple lenders. Getting more than one quote is important, and with just a soft inquiry on your credit report, your credit score won’t suffer.

Consider the Costs

Refinancing a car loan comes with fees that will ultimately impact your overall savings. Before you refinance, talk to your current lender about any fees you’ll have to pay, like a prepayment penalty.

You should also understand what fees your new lender will charge, like an origination fee. If those costs end up being more than your savings, refinancing your auto loan probably isn’t worth it.

Understand the Credit Impact

When you refinance a car loan, the bank will run a hard credit inquiry. This action will reduce your credit score by a few points, but that’s not the only factor in play here. Once you open your new loan, the average age of your credit accounts will drop, which could lower your score even more.

Start with Your Bank

We recommend that you start the refinance process with your personal bank. There are benefits to working with a financial institution you already have a relationship with. For example, you might be able to qualify for a lower interest rate and improve your chance of approval. Even if your credit score isn’t perfect, your bank may still be willing to work with you, especially if you have a strong financial history.