When Should You Refinance Your Car Loan?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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If you have a car loan with high monthly payments and interest rates, you’re probably wondering how you can lower it. Auto refinancing might just be what you’ve been looking for. Refinancing your car loan may save you money that you can put toward other financial obligations.

So, how does auto refinancing work? Find out here if refinancing is right for you.

Refinance Your Auto Loan

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What is a Car Loan?

A car loan or an auto loan is a sum of money secured by the car you plan to purchase. In other words, the car serves as collateral for the loan. That means, if you fall behind in your loan repayments or default, the lender can repossess the car.

Car loans work pretty much like other types of loans. Before you take out an auto loan, you enter into an agreement with the lending institution to repay the loan over time plus the interest. The lender retains the ownership of the vehicle until you make the loan repayments in full.

You can get a car loan directly from a bank, credit union, or through a car dealership.

What is Auto Refinancing?

Auto refinancing is replacing your current car loan with a new auto loan, typically with a new loan term and annual percentage rate (APR). These loans are often secured by a car and paid off in fixed monthly installments over a set period of time, usually a couple of years.

People refinance car loans for various reasons. Most of the time, the goal is to save money over time. You can refinance to lower monthly payments, reduce interest rates by refinancing a high-interest loan to a lower interest loan, remove or add a co-signer to your loan, or adjust loan terms. No matter the reason for refinancing, it’s essential to understand the possible outcomes.

How Does Auto Refinancing Work?

When you refinance your car loan, you’re virtually replacing your current loan with a new one. Your new loan pays off the existing car loan, and after that, you start making monthly payments on your new loan. 

Typically, the new loan comes with more favorable monthly payments, interest rates, and loan terms. Depending on the lending institution, you could save money over the course of the loan term.

You can apply for auto refinancing at an institution of your choice, provided that you have all the paperwork needed. But before taking the plunge, it’s crucial to weigh the pros and cons of auto refinancing to make an informed decision. 

Pros of Auto Refinancing

Refinancing a car loan comes with various benefits, including:

Lower Your Monthly Car Payments

Refinancing can help lower your car loan monthly payments in two ways 一 getting a lower interest rate or extending your loan term. However, extending your loan term could increase the total amount of money you’ll need to pay back. So, the only situation where you may benefit when you extend the term of your loan is if your lender accepts lower monthly payments.

Reduce Your Interest Rate

Interest rates heavily impact the amount of money you’ll pay over the loan term. Let’s say you’ve improved your credit score since you took the loan, you can consider refinancing as you may qualify for lower interest rates. A lower interest rate can save you hundreds of dollars in the long run.

Change Your Car Loan Terms

The ability to adjust car loan terms is another key benefit of auto refinancing. If your monthly payments are too high, refinancing with a new loan with a longer-term can lower it. The only downside of longer-term loans is that you may end up paying more than you would if you took a shorter-term loan.

Remove or Add Someone as a Co-Signer to Your Loan

Refinancing can also help you meet your personal needs, such as removing or adding a co-signer to your loan. It’s easy to do this since refinancing means new loan terms.

Refinance Your Auto Loan

4257 Reviews
Read this Auto Approve review to learn how to get more competitive interest rates on your auto loans, and lower your payments.

Cons of Auto Refinancing

While auto refinancing may seem like a good deal, it comes with trade-offs.

Can Affect Your Credit Score

The most obvious disadvantage of auto refinancing is its impact on your credit score. Whenever you apply for a new loan, lenders will make a hard credit check to determine your ability to repay a loan. Hard inquiries appear on your credit report and can affect your credit score. That said, on-time payments on your new loan can correct for this over time.

Additional Fees

Refinancing often means additional fees, such as application, origination, and transfer fees. You may also pay a prepayment penalty for paying off your current loan early. Not all lenders charge these fees, though. Ensure that you read the fine print of your existing agreement to know whether there are any extra fees.

Not For Everyone

Refinancing doesn’t make sense for everyone. It only makes sense if it can help you to save cash. If you’re close to paying off your current loan, refinancing to a new one may not be in your favor. 

Plus, lenders may impose restrictions on refinancing. For example, lending institutions can refuse to refinance your car loan if it has exceeded a specific mileage.

When Does It Make Sense to Refinance?

Refinancing may not work for everyone, but it can benefit you in some scenarios. You may want to consider auto refinancing in the following situations:

Interest Rates Are Lower Since You Took Out Your Original Auto Loan

If you purchased a car when interest rates were high, consider refinancing your car. Refinancing can help you save a lot of cash over the life of the loan, provided that you do not extend your loan term. 

Your Financial Situation Has Improved

Many factors go into determining auto loan rates, including your credit score and debt-to-income (DTI) ratio. Bolstering your credit history and lowering your DTI ratio can help you get more favorable terms when refinancing your car loan. 

You Didn’t Get a Good Offer the First Time

When applying for a car loan for the first time, you may have got an offer that is not suitable without your knowledge. This happens, especially if you got your original loan from a car dealership, as they often charge higher rates.

It’s Hard Keeping Up with the Bills Each Month

If your monthly payments are so high that you start falling behind your monthly bills, it’s time to refinance your car. Though you may not get a lower interest rate, an extended repayment period can help lower your monthly payments.

Where You Can Get Started with Auto Refinancing

You can get auto refinancing online, but choosing a lender with favorable terms to help you save money can be overwhelming. Auto Approve is an online platform that can help you refinance your vehicle with a reliable lender. The company also offers motorcycle refinance and auto lease purchases, along with auto refinancing.

Why Auto Approve? 

  • Exceptional service: With Auto Approve, you get the best service for you. Plus, you talk to real people when inquiring about their financial products. 
  • Competitive rates: Auto Approve offers the best rates, starting from 2.25% APR. It’s suitable for anyone looking for competitive rates and who wants to pay less money on their car loans.
  • Streamlined process: You don’t have to worry about paperwork since Auto Approve does the heavy lifting for you as you wait for your loan to be processed.

Visit their website to refinance your car with Auto Approve. It’s as easy as filling out a form to find better interest rates and lower your monthly payments on your car loan.

Auto Approve

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