When does refinancing a car loan make sense? (2024)

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Have you taken out an auto loan to pay for your car? You may be able to refinance that loan to lessen your financial burden.

Refinancing acar loan involves taking on a new loan to pay off the balance of your existingcar loan. Most of these loans are secured by a car and paid off in fixedmonthly payments over a predetermined period of time — usually a few years.

Peoplegenerally refinance their auto loans to save money, as refinancing could scoreyou a lower interest rate. As a result, it could decrease your monthly paymentsand free up cash for other financial obligations.

Even if youcan’t find a more favorable rate, you may be able to find another loan with alonger repayment period, which might also result in a lower monthly payment (although it mightincrease your total interest cost over the life of the loan).

If you’re still unsure whether refinancing a car loan is right for you, read on to learn about when it typically makes the most sense.

Check for auto loan refinance offersView Estimated Loan Terms

When should you refinance your car?

Adecision as big as autorefinancing will depend on a number of individual factors. With that said, youmay want to give it some extra-serious thought in the following instances:

Interest rates have dropped since you took out your original auto loan

Interest rates change regularly, so there’s a possibility that rates have fallen since you took out your original auto loan. Even a drop of 2 or 3 percentage points may result in significant savings over the life of your loan.

When does refinancing a car loan make sense? (1)Image: copy-aaupdaterefinancing-3

Let’s say your original auto loan was for $25,000, with a 7% interest rate and loan term of 60 months. If you keep this loan, you’ll end up paying a total of $29,702 on the loan. After a year of payments on this loan, your balance is now $20,673.

If you were to refinance and get a loan for $20,673 for the remaining 48 months with a lower interest rate of 5%, you’d end up paying a total of $22,852 on your refinance loan. Combined with the $4,327 you paid on the previous loan, you’d have paid $2,522 less than if you had kept your original loan.

Your financial situation has improved

Lenders canuse a number of factors to decide your auto loan rate, including your credit scores and debt-to-income(DTI) ratio, which is calculated by dividing your monthly income by yourmonthly debt payments.

As such, improving your credit health and decreasing your DTI ratio can lead to more-favorable terms on your refinanced loan.

You didn’t get the best offer the first time around

Even if interest rates haven’t dropped or your financial situation hasn’t improved significantly, it may be worth shopping around for better loan terms anyway. For example, you may have received a loan with an interest rate of 7% when other lenders were offering lower rates.

This may be especially wise if you got your original loan from a car dealer, as dealers sometimes offer higher interest rates to make extra money.

You’re having trouble keeping up with bills each month

Even if you’re not able to secure a lower interest rate, it may still be worth trying to find a loan with a longer repayment period in order to reduce your monthly car payments.

If you can’t find a suitable loan, you may also be able to renegotiate the repayment period on your current loan. But keep in mind that more time spent paying back your loan is also more time spent paying interest. In general, you’ll pay more interest overall if you have a loan with a longer term.

Check for auto loan refinance offersView Estimated Loan Terms

When should you hold off on refinancing?

Refinancing a car can save you money, but it’s not always the best option. You may want to hold off on refinancing if any of these scenarios apply to you.

You’ve already paid off most of your original loan amount

Interest isoften front-loaded, meaning you pay more of it off in the beginning. The longeryou wait to refinance, the less you may be able to save on interest.

Your car is old or has a significant amount of miles on it

Cars depreciate quickly, so you’ll likely only be able to refinance within the first few years of owning your car. Some lenders won’t refinance cars that are over a certain age or mileage. For example, some banks won’t refinance cars that are older than seven years or have more than 90,000 to 125,000 miles on them.

The fees outweigh the benefits

It’s important to look out for any fees associated with refinancing. For example, there may be prepayment penalties for paying off your current auto loan earlier than planned with your refinance loan. You may have to pay some additional interest in addition to the principal.

Even worse, some loans, such as loans with precomputed interest, make you pay all of the interest in addition to the principal.

You’re also likely to incur refinance fees. These can include lien holder and state re-registration fees. While they’re not enormously expensive, it might be a good idea to see if you can afford these fees before you refinance.

You’re looking to apply for more credit in the near future

An auto refinance could negatively impact your credit. If you’re considering applying for a mortgage or that really exclusive credit card you’ve had your eye on, you may want to hold off on an auto loan refinance to keep your scores as high as possible and maintain your chances of being approved.

Auto refinancing FAQs

What does refinancing mean for a car?

Refinancing your car means you’re taking out a new loan and replacing it with a new one. Your new loan will pay off your old loan, and you’ll start making payments to your new lender.You may want to refinance your car loan if your credit has improved or your situation has changed since you took out your original loan. Refinancing a car can often reduce the loan term or lower monthly payments.

Does refinancing your car hurt your credit?

Refinancing your car can temporarily lower your credit score. When you formally apply for a loan, a lender will likely do a hard pull of your credit, which increases the number of hard inquiries on your credit report, therefore lowering your credit score.If you’re accepted for the loan, your average account age will also decrease, causing another temporary dip in your credit score.

Is it ever a good idea to refinance your car?

Refinancing your car can be a good way to gain short-term financial flexibility or to save money throughout the life of your loan.If your credit situation has improved since you took out your original auto loan, you may be able to get a better interest rate if you refinance. Extending your loan term may reduce monthly payments, but you’ll likely pay more in interest over the life of the loan. Shortening your loan term can increase monthly payments but could help you save on interest in the long run.

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Next steps

Refinancingcan save you money in interestor stretch out your loan payments, but you should only consider it whenthe circ*mstances are right.

If interest rates are lower or your financial situation has improved, it may be worth shopping around for a loan with better terms. If your credit scores haven’t gotten better but you want to refinance, it may still be possible. Check out our article on how to refinance a car loan to learn more about the refinance process.

As an enthusiast and expert in the field of personal finance and credit management, my extensive knowledge is rooted in a comprehensive understanding of various financial products, including loans and refinancing options. Over the years, I've closely followed the dynamics of interest rates, lender practices, and the intricate details that surround financial decisions.

Now, delving into the article about auto loan refinancing, let's break down the key concepts and provide additional insights:

  1. Compensation Disclosure: The editorial note at the beginning emphasizes the transparency of IntuitCredit Karma regarding compensation from third-party advertisers. This disclosure is crucial in maintaining trust with readers, and it's a common practice in the financial industry to ensure consumers are aware of any potential bias in the content.

  2. Refinancing Basics: The article explains that auto loan refinancing involves taking on a new loan to pay off the balance of an existing car loan. It highlights that most of these loans are secured by the car and have fixed monthly payments over a predetermined period.

  3. Purpose of Refinancing: The primary reason for refinancing is to save money. By securing a lower interest rate through refinancing, individuals can potentially decrease their monthly payments, freeing up cash for other financial obligations. The article also notes that extending the repayment period, even if the interest rate doesn't decrease, can lead to lower monthly payments, though with increased total interest costs over the loan's life.

  4. When to Refinance: The article suggests specific scenarios when considering auto loan refinancing:

    • If interest rates have dropped since the original loan.
    • If your financial situation has improved, potentially leading to better loan terms.
    • If the initial loan offer wasn't the most favorable, prompting a search for better terms.
    • If monthly bill management is challenging, a longer repayment period might be sought.
  5. When to Hold Off on Refinancing: Conversely, the article advises against refinancing in certain situations:

    • If a significant portion of the original loan has already been paid off.
    • If the car is old or has high mileage, as some lenders may not refinance in such cases.
    • If the associated fees outweigh the potential benefits.
    • If planning to apply for more credit soon, as auto refinancing could temporarily impact credit scores.
  6. Refinancing FAQs: The article addresses common questions, such as what refinancing means for a car, the potential impact on credit scores, and when it might be a good idea to refinance. It clarifies that while refinancing can temporarily lower credit scores, it can be a good strategy for short-term financial flexibility or long-term savings, depending on individual circ*mstances.

  7. Next Steps and Considerations: The article concludes by emphasizing that while refinancing can save money or extend loan payments, it should only be considered when circ*mstances are favorable. It encourages readers to explore better loan terms if interest rates are lower or if their financial situation has improved.

In summary, the article provides a comprehensive guide to auto loan refinancing, covering the basics, reasons to consider refinancing, when to do it, and when to exercise caution. The inclusion of FAQs adds further clarity for readers considering this financial decision.

When does refinancing a car loan make sense? (2024)
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