When Should I Refinance My Car Loan?

by Stephanie Colestock Updated on: December 26, 2019

Were you happy with your car loan when you got it? Not many are, so you might consider refinancing.

When considering a refinance, sooner is usually better than later.

One of the best times to refinance is when interest rates are down.

Take action if your credit score sees a marked improvement.

Let’s be honest: no one enjoys forking over their car payment each month. Unless you have tens of thousands of dollars available to buy a car in cash, though, an auto loan is a necessary evil. Long after the new car smell has worn off, those monthly car payments will still remain. On top of auto insurance and maintenance, though, this can mean that your vehicle-related expenses really pinch the budget and impact your household finances.

We polled hundreds of RateGenius customers to see when they realized refinancing their vehicle could be a smart move and surprisingly, 33% said they knew they needed to refinance the car within one month of purchasing it.

So, what can you do to reduce your out-of-pocket expenses each month? Well, one easy way is to simply lower your car payment.

Lowering your monthly car payment is most often accomplished with a refi: by refinancing your auto loan. Depending on your credit and the specifics of your auto loan, this is usually a pretty easy process.

However, there are times when a refi makes more sense than others, and a few things to watch out for before you begin the process of refinancing your own auto loan. Let’s take a look at what a car refinance loan does, why you might want one, and what you should keep in mind when you’re shopping around for the perfect new loan.

The What and Why of Refinancing a Car Loan

When you refinance your car, you’re essentially taking out a loan in order to replace another loan. The purpose? To save yourself time, money, or both on the repayment.

“Sometimes, your original lender will offer to refinance your auto loan for you after a period of time has passed. You can also seek out another lender for your refi if they are offering more competitive rates and terms.

Applying for a refinanced auto loan is similar to taking out the original auto loan. You will need to provide financial information such as your monthly income and expenses. The lender will also run your credit in order to determine whether you qualify for the car refinance loan, and if so, at what interest rate. When picking a rate for your new loan, the lender will also take into account the new terms you request; typically, shorter loan lengths qualify for lower interest rates.

Once you’re approved for your auto refinance loan, the new lender will fulfill your original loan. This means that they will pay it off directly, and your original account will be closed and satisfied. The new loan will begin at that time, and your monthly payments will now be directed to your new lender.

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How Refinancing Your Car Loan Can Save You a Lot of Money

You could refinance a loan in an effort to lower monthly payments, if you want to create more wiggle room in your budget. You could also refinance a loan if you wanted to score a lower interest rate. This is a great option if market rates have dropped since taking out your loan, or if your credit has improved and you now qualify for a more competitive rate.

Sometimes, you can actually do both.

For this reason, there are both short-term and long-term savings involved with refinancing your auto loan. You can save money immediately by choosing a refi that lowers your monthly payments. This allows you to put that extra cash to work elsewhere, such as building up a savings account, paying off credit card debt, etc.

Want to know just how much this will trim from your annual spending? On average, refinancing with RateGenius saves people a whopping $936 a year. 

What could you do with almost a thousand extra dollars over the next 12 months?

In the long-term, you’ll save even more by reducing your interest rate with a car refinance loan. This means that you’ll pay less in total over the life of the loan, making your car purchase essentially cheaper.

Who Should Refinance Their Car Loan?

There are plenty of reasons that you should consider refinancing your auto loan. In fact, it’s a great option for almost every borrower at some point in the course of their repayment.

If you want to pay less in interest over the life of your loan, you can refinance. This is especially true if interest rates have dropped across the market or your financial situation has improved since you originally took out the loan.

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You can often also get a lower interest rate if you refinance your loan with a more aggressive repayment schedule. While this won’t free up as much cash on a monthly basis, it will save you more in the long run.

Chances are, your credit score is different today than it was the day you took out your auto loan, even if the change is slight. If your score is significantly better, though, refinancing your car loan is worth considering.

Considering that your interest rate and loan options are largely determined by your credit report at the time of application, you can get much better loan terms if your score improves.

Is your goal to lower your monthly car payment? Then a refinance loan can help. This is an excellent option when you need to improve your cash flow or free up funds for another reason. If interest rates are down overall, you can often get much better loan terms than when you bought the vehicle, even if your credit hasn’t changed much. Refinancing your auto loan with a lower interest rate or choosing a longer repayment schedule can often reduce your payments, creating more wiggle room in your budget.

Refinancing your car loan with a cosigner

Did you take out your original auto loan with a cosigner? Over time, you may want to release them from the obligation of your loan (or they may want to be removed), in which case a car refinance loan may be your best option. By refinancing your auto loan, you can easily remove your cosigner from the debt… and hopefully, your positive repayment history will also earn you better loan terms in the process.

Beware of the prepayment clause

There is one thing to watch out for when planning a loan refinance, though. If your original loan doesn’t have what’s called a prepayment clause, you may be unable to proceed — or if you do, you might be subject to significant fees.

Prepayment penalties, or early repayment penalties, are designed to lock you in to the terms of the original auto loan. This means that you may be fined for doing things like overpaying each month or paying off the loan ahead of schedule (like you’d technically do with a refi).

If this is the case, you need to be sure to read the fine print of your original loan. In some cases, you may still save more with a car refinance loan than you’d pay in fees for early repayment.  Other times, it’s not worth the penalties. If you have a prepayment clause in your original contract, you should be good to go, but if not, call your original lender and see how much refinancing your auto loan will wind up costing you in penalties.

When Should I Refinance a Car Loan?

There are times when refinancing your auto loan makes more sense than others. But you should also know that you can refinance as many times as you want.

When considering a refinance, sooner is usually better than later.

Not only will an earlier refi save you more money over the course of the loan than a refi toward the end of the repayment, but it also gives you the opportunity to refinance your car again down the line.

It’s also important to refinance earlier on so that you aren’t limited by the vehicle’s specifics. For instance, many lenders will only refinance a vehicle up to a certain number of miles or within a specific age range. For exmaple, here at RateGenius, we work with lenders that refinance vehicles all the way up to 100,000 miles and 10 years old. Other lenders may not refinance vehicles older than five or six years old or that have high mileage.

If your vehicle was used when you purchased it, you will be even closer to these limits. Keep these in mind if you’re hoping to refinance your car loan soon.

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You’ll also need to watch out for the vehicle’s value, which decreases every day and with every mile you drive. Many lenders set limits on the refinance loan amount compared to the vehicle’s value, called the loan-to-value ratio (LTV).

One of the best times to refinance is when the economy shifts.

If your LTV is too high — meaning that you’re asking to borrow too much compared to how much the vehicle is actually worth — you’ll have a hard time getting approved for a refinance loan.

Refinancing Your Car Loan

The idea of refinancing may seem daunting, especially if you’re content with your current repayment schedule. However, by taking a look at the amount of money you could save both monthly and in the long-term, a car loan refi is usually well-worth the effort.

Timing your refi correctly is key.

You’ll want to move sooner rather than later, take advantage of economic shifts, and definitely act if your credit score sees a marked improvement. By doing so, you can score the lowest rate, and best terms, possible… and save the most money along the way!

About The Author


Stephanie Colestock

Stephanie Colestock is a DC-based personal finance writer with an expert focus on credit and lending. With over ten years of industry experience, she is a regular contributor on sites such as Credit Karma, The Balance, Quicken Loans, Dough Roller, Finance Buzz, and more. She enjoys teaching people how to optimize their finances and save themselves money in the process.


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