When Should I Refinance My Car Loan?

by Stephanie Colestock

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 1 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 refi does, why you 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

When you refinance, you are 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 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 the rate for which you qualify.

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 refinance, 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.

Compare Auto Refinance Rates
No impact to credit score.
Shop For Rates Now

How Refinancing Can Save You a Lot of Dough

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? Well on average, 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 refi. This means that you’ll pay less in total over the life of the loan, making your car purchase essentially cheaper.

Who Should Refinance?

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.

Auto Refinance Calculator Calculate Your Savings

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, a refi is worth the effort.

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 payment? Then a refi can help. This is an excellent option when you need to improve your cash flow or free up funds for another reason.

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.

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 refi is 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.

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, or early repayment, penalties are designed to lock you in to the terms of the original 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 refi 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 a refi will wind up costing you in penalties.

When Should I Refinance?

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 refi 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 an auto loan up to a certain number of miles or the vehicle’s age.

Here at RateGenius, we will refinance all the way up to 100,000 miles and 10 years, but other lenders may offer much less. Plus, if your vehicle was used when you purchased it, you will be even closer to these limits!

2019 Auto Refinance Rates See Today's Rates

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 be denied.

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 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 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 is a personal finance writer and editor, specializing in topics like budgeting, debt, credit cards, and banking. Her work can be seen on Forbes, US News, and Dough Roller, among others. She is a Baylor University grad, currently living in Washington, D.C.


Read More

by Stephanie Colestock

What You Need To Know About the New Experian Boost

Improving your credit score usually takes years’ worth of effort. With Experian Boost, you can increase your score in seconds. By the time you reach adulthood, you already know that your credit score is very important. Even if you don’t know exactly how those three-digit numbers will…

by Stephanie Colestock

When Should I Refinance My Car Loan?

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…

by Chonce Maddox

Not all Credit Scores are Created Equal — Just Look at UltraFICO

Did you know you have more than one credit score? Which one is the best or the right one? Your Credit Score Matters Your credit score is one of the most important numbers influencing your financial health. For lenders, it is a major factor for determining your trustworthiness as…

review review

Customer Reviews

Read our 11289 Certified Reviews

4.9

READ OUR REVIEWS
apply now apply now

Apply Now

Lower your interest rate and drop monthly payments by an average of $76*/month!


GET STARTED