How to Refinance Your Auto Loan

Is it possible to refinance an auto loan? Unequivocally, that answer is “yes.”

We may believe that only houses are refinanced, but that isn’t true. Indeed, just as you can save a bundle by refinancing your home, there are savings to be had for your car, truck, utility vehicle, or van. With this in mind, let’s examine how new financing can save you money.


To Refinance or Not

One of the chief factors in refinancing — beyond your income and ability to repay the loan — is your credit score. Specifically, that three-digit figure determines whether you’ll qualify for a loan and the interest rate you’ll pay.

For certain consumers, a low credit score walloped them with a high-interest rate when they took out the loan. Thus, with loan terms of five years or lengthier, that’s several months of paying back on a loan that may not reflect your current credit standing.

Indeed, if your financial picture has changed significantly since you took out the original car loan, your credit score may reflect that improvement. This is especially valuable for anyone whose credit score was below 600 when they were approved. Moreover, if your score has soared above 700 since, refinancing for a lower rate may save you $25, $50, or above.

Considering a New Auto Loan

Consumers have several options when shopping for car loan refinancing.

First, they can reach out to their current lender to examine their options.

This may be ideal for a few as they already have a working relationship with the lender. Specifically, leverage that relationship to put together a case for a new loan with improved terms. Therefore, you might be able to lower your rate and shorten your term, while saving capital.

Second, work with your regular financial institution.

If your bank or credit union did not finance your auto loan, it is time to discuss with a representative about qualifying for refinancing. Your financial institution may not advertise auto loan refinancing as aggressively as they do for new or used car loans. But that doesn’t suggest they aren’t offered. Certainly, you’ll only know for certain if you ask. Again, leverage your relationship with your banker to acquire a new loan.

Third, shop around.

Your current lender and your financial institution are ideal sources for shopping for car loan refinancing. But they are far from the only places to consider. Unquestionably, an internet quest will turn up other lending sources that handle auto loans. Verify that the lender is legitimate, is a federally backed financial institution, and has a solid track record with consumers. In other words, check the reviews before filling out an application.

Comparing Auto Loan Offers

When shopping for refinancing, you may find multiple loan options available. Thus, it can be difficult to compare them at face value. Notably, a car loan calculator will disclose how much you’ll pay.

We’ve come up with a few scenarios to help you gauge payment options, including your current car loan. For our example, we’ll assume that two full years of payments are completed, leaving 36 monthly payments left when refinancing.

Scenario No. 1: Your Current Loan

Let’s say you borrowed $20,000 for 60 months with an 8-percent APR. Here, your monthly payments are $406 and you’ll pay off $24,332 to satisfy the loan. Consequently, this indicates your interest payment is $4,332.

Scenario No. 2: Refinance Option No. 1 – Maintain the Status Quo

After two years of making payments, your loan balance has declined by $9,744 to $14,588. It doesn’t seem like you’ve made tremendous headway since you borrowed the $20,000, but that’s the price of your 8-percent APR. When seeking a new loan your new creditor will pay off the original loan. That amount though should be less than the loan balance, but it might include a prepayment penalty.

Your refinancing option based on an improved credit rating (700 or above) and a shortened term cuts your interest rate to 4 percent APR for 36 months. Furthermore, we’ll assume that you aren’t putting anything down and that your loan obligation is $12,500 moving forward.

With the new loan, your payments are $369 per month for 36 months. Therefore, you’ll save $37 per month or $1,332 over the life of the new loan. That’s a significant amount of capital saved.

Scenario No. 3: Refinance Option No. 2 – Shorten the Term

Perhaps you have your eye on a new vehicle and prefer to pay off this loan faster. You’re still willing to wait, but a 24-month car loan is what you have in mind. The shorter-term loan will yield a competitive rate, but possibly not by much.

With this scenario, we recommend putting a modest amount of money down. In our example, it is $500. Therefore, you’re borrowing $12,000 over 24 months at a 3.5-percent APR. Here, your monthly payments are $518 and that’s $112 additional than what you’re paying now. On the other hand, your interest payments fall to $442 moving forward.

Remember, with the existing loan your remaining payments are $14,616. Notably, with a two-year loan, you’ll pay $12,432 for $2,184. That’s a significant amount of wealth saved.

Auto Loan Considerations

We did not involve sales tax and other fees that are often assessed when refinancing. Thus, your savings will come in lower. There are other considerations to keep in mind, including the mileage on your odometer.

For instance, if you’ve racked up significant miles already, this may affect your qualifying. Furthermore, if you are “upside-down” with your current loan, implying you owe more on the car than it is worth, it may not be possible to refinance. Or, the lender may require you to come up with a significant down payment. Remember, lenders base loans on risk assessment and will do everything to protect their institution when considering loans.

Lastly, we do not recommend refinancing if you’re about to undertake a major event, such as acquiring a home. Numerous inquiries on your credit reports indicate to lenders that your financial picture may not be strong. In this case, riding out your current auto loan while seeking a mortgage is sound advice. Once you’re in your new residence, you might explore your auto refinancing options again, provided your credit remains robust.

Photo Credits

Image by Gerd Altmann from Pixabay

Image by Michal Jarmoluk from Pixabay

See AlsoHow to Avoid Overpaying on a Used Car

Matt Keegan
Author: Matthew Keegan
Matt Keegan is a journalist, media professional, and owner of this website. He has an extensive writing background and has covered the automotive sector continuously since 2004. When not driving and evaluating new vehicles, Matt enjoys spending his time outdoors.

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