Should I Refinance My Car Loan to Lower My Payment?

Refinancing your auto loan lets you take advantage of lower interest rates or different loan terms. You can lower your monthly payments to better fit your budget or slash the total interest you’ll pay. 

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But like any loan, there are requirements you’ll need to meet if you want to refinance an auto loan. The timing of your refinance can make a big difference in your savings, too. We’ll walk you through how to decide when you should refinance your car loan based on your credit, current rate, vehicle value, and financial goals.

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Key takeaways

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• You should refinance when the potential benefits outweigh any potential costs. Consider factors like your credit score, market conditions, age of the vehicle, and length of the loan.
• Refinancing an auto loan can save money by lowering your interest rate or monthly payment.
• It could be a great time to refinance if your credit score has improved or interest rates have dropped since you took out your loan.
• If your upside down on your car loan or interest rates have gone up, you might not save enough to make refinancing worth it.

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Why drivers choose to refinance

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If you’ve never considered refinancing, it’s natural to wonder “Why should I refinance my car?” 

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Refinancing replaces your current auto loan with an entirely new one, which means it might help you: 

• Lower your payment: Many drivers refinance to give themselves lower monthly car payments. They do this by extending the loan or switching to a lower interest rate. Both factors can shrink what you pay each month (though you could pay more in the long run by extending the term).
• Save on interest: Increasing your monthly payment, shortening your loan term, or changing the interest rate can help you save on the overall cost of your car loan by decreasing the total interest cost. 

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When to refinance a car

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There are a few instances when it makes sense to refinance your car: 

• Your credit score has improved: Lenders save their best rates for borrowers with good credit. If your credit score has gone up since you bought the car, you could qualify for a lower rate, which could save you money on interest.
• Your current interest rate is high: Similarly, if interest rates were high when you took out your loan but they’ve dropped since then, it could be a great time to get a loan with a new lower rate. A lower interest rate means lower overall interest costs, leaving more of your money for other needs.
• You need (or want) a lower monthly payment: Life happens. Maybe your income changed since you bought your car, or you have new bills to pay. Refinancing is the perfect way to change up your loan terms to get a monthly payment that works better for your current budget.

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When not to refinance a car

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There are some scenarios when refinancing might not be the best choice. If any of the following apply to you, it might not be worth it to refinance:

• You owe more than your car is worth: This is called being “upside-down” or “underwater” on your loan. In this case, refinancing could add to your costs instead of helping you.
• Your vehicle is very old: Refinancing an older car is possible, but it can be tricky to qualify. Lenders often don’t want to take on the risk that comes along with older vehicles or ones with a lot of miles on them.
• You’re near the end of your loan: Refinancing when the car is almost paid off typically doesn’t make sense financially. You would add to your interest costs and extend the loan term without seeing much benefit. It’s usually better to pay off the current loan instead.

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How to decide if you should refinance

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Deciding whether you should refinance your car comes down to the cost vs. the benefit. If the benefits outweigh the costs, it’s probably a good idea. If not, you may want to pass. 

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Here are the most important factors to think about:

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Your credit score has gone up

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If your credit is now rated “good” or “exceptional,” meaning you have a credit score of about 670 or higher, than you might qualify for great terms on a new loan.

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Rates have come down

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Similarly, if rates were high in general when you got your loan but they’ve come down a percentage point or two, you might find significant savings by refinancing.

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There’s no prepayment penalty

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Check your current loan documents for fees and penalties. If there’s no cost to paying off your current loan with a new loan, then it could be a smart move.

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Your vehicle and loan meet requirements

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Lenders often set limits for the vehicle age, mileage, and amount remaining on the loan for an auto loan refinance. For example, some lenders will cap the vehicle age at 10 years and the mileage at 100,000, or require that you have at least $5,000 remaining on your loan balance to refinance. 

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You have plenty of time left on your loan

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If you have at least two years left on your loan, you may be a good candidate for refinancing. That’s because you’ll probably have enough principal remaining on your loan to make a refinance worth it. 

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Consider all your options

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Auto loan refinancing is a common way to lower your monthly payment or decrease the amount of interest you pay. It can save you money, but there are some tradeoffs to consider. Your best bet is to run the numbers so you can compare the payment and costs of a refinance to the loan you’re currently paying. 

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Use a refinance savings calculator to find out how much you could save and what your new payment could be. Then, compare lenders with RefiJet to see your best offers and begin the refinancing process.

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‍FAQs

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Here are some commonly asked questions about whether you should refinance your car.

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How do I know if I should refinance my car or keep my current loan?

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Consider whether your credit score has gone up or if interest rates have come down. Those are two factors that could mean big savings on a new car loan.  

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How much can I save by refinancing my auto loan?

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It depends on several factors, including your loan amount, current interest rate, new interest rate, and length of loan. However, you could save hundreds or even thousands by refinancing. Use an auto refinance calculator to plug in your details and see specific savings potential.

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Does refinancing hurt my credit score?

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When you apply for an auto refinance, the lender will do a hard credit check. That could drop your score by a few points, but the hit is temporary.

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What fees or costs should I expect when refinancing my car loan?

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Check whether your current loan has a prepayment penalty, which is a charge for paying the loan off early. These are uncommon. You’ll also want to check whether your new loan has application or origination fees, which could also add to your costs. 

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When should I not refinance my car loan, even if I qualify?

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Sometimes it’s not about whether you qualify, but rather whether the other aspects of a refinance are worth it. If the new loan has a higher interest rate, longer terms, or larger fees, you might not save enough to make the refinance worth it.

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