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When to Refinance your Auto Loan

Written by Banks Editorial Team

Updated September 28, 2023​

3 min. read​

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Here’s a guide on when to refinance your auto loan to access lower interest rates and save money on your monthly car loan payments. For some consumers, a particular vehicle exudes a strong emotional appeal, and they simply must have it. These consumers may be less concerned with the price or the manufacturer’s warranty. For other consumers, buying a vehicle is more about finding reliable transportation and convenient features.

However, if you bought that vehicle with any urgency, you may not be happy with your current loan terms. And you may feel stuck with monthly payments that are too much for your budget. The only way to escape the current loan terms without changing vehicles is to pay the note down faster or to refinance the auto loan. Unfortunately, your current lender may not be willing to work with you to refinance your loan, particularly if your vehicle has significantly decreased in value since you obtained the loan.

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5 Reasons to Refinance Your Auto Loan

Here are five reasons why it could be time to refinance your auto loan:

1. Your interest rate is higher than it should be

A car loan is calculated as a simple interest loan. The bank or lender takes the principal amount and applies the fixed percentage rate. Your monthly payment, although fixed, includes a portion that goes toward the principal and a portion that goes toward the accrued interest. As the end of the loan approaches, more of the monthly payment goes toward the principal, and less goes toward the interest. That’s because the total principal of the loan decreases over time.

2. You improved your credit score since signing for the loan

If you raise your FICO credit score by 150 points – say from 600 to 750 – you may be able to refinance your auto loan with a lower interest rate. A big jump in your score could mean the difference between using a secondary lender and a primary lender. The latter of which usually offers better rates. You might be able to refinance with your bank instead of using a credit acceptance corporation. When you refinance at a lower interest rate for the same repayment term, you should pay less interest overall. However, with vehicle refinancing, the repayment period starts over. So, if you had a six-year loan and refinance the vehicle for six more years to lower the payment, it would take 72 months to repay the loan. Be sure to refinance an auto loan with a term that fits your budget, but ideally not for a term longer than your vehicle’s warranty.

3. You aren’t happy with your lender

Sometimes, feeling unsatisfied with an auto lender only surfaces when you get behind on the payments. Until then, you make your payment every month and have little or no contact with the lender’s customer service agents. If you miss a payment or, worse, fall sixty days behind, then you face late fees and possible repossession. Also, your lender may not be willing to move a payment or two to the end of the loan, which would help you catch up. In cases like these, you could receive daily calls from the lender and experience a different side of the company. That’s because your account has entered collections. Refinancing with another lender helps consumers to start fresh and to work with better customer service personnel.

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4. You want to change the loan repayment terms

What if you want to free up some funds from your budget to purchase an extended warranty before the manufacturer’s warranty expires? Or, you want a different repayment interval, such as paying twice per month instead of once per month or moving the payment to a different due date. Or you may want to extend the term of the loan so money is freed up in the monthly budget for expenses such as student loans. If you borrow enough principal to pay off the first loan and refinance at a lower interest rate, you should save money in the long run.

5. You can’t afford the payments

Obtaining a new loan with a longer term could lower your monthly payment, but it could also mean that you’ll pay more over the remainder of the loan. If you want to lower your payment, for example, by $100 per month, then spread out the remaining principal over more months. If the annual interest rate is lower because your credit has improved, then the new loan may cost you less out of pocket than you would have paid under the original loan, even after increasing the number of payments.

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