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    What Is Auto Loan Refinancing?

    Auto loan refinancing is the process of paying off an existing loan on your car or truck and starting a new loan. This may be done with the same lending company you already have or a new lending company.

    Applying for a car loan refinance can be a somewhat complicated and work-intensive process in which you have to provide information about your:

    • Credit.
    • Work history.
    • Income.

    Lenders will use this information to determine whether they think you qualify for a new loan with better terms than you currently have.

    Visit our page on How to Refinance a Car Loan for more information.

    Why Refinance a Car Loan?

    Generally there are two reasons people choose to refinance their car loans:

    • To save money.
      OR
    • To lower the monthly payment on the loan.

    Saving Money

    Many people opt to refinance their car loan with a lender who is offering a lower interest rate than you already have. With this option, you can save money every month due to the lower interest rate.

    You can also choose to refinance with a lender who will shorten the length of your loan by keeping the same interest rate for a shorter amount of time. Note that your monthly principal payment may go up, but the amount you pay in the long run will be less.

    Lowering Your Monthly Payments

    You can refinance your loan to lower your monthly payments without changing the actual amount of money you owe through the lifetime of the loan. This strategy is often used when there is a change in someone's income and that person can no longer afford the monthly payments.

    In this case, the lender offers a lower monthly payment plan, but extends the length of the loan. Because you will be paying the interest rate of your loan over a longer period of time, this type of loan refinance may end up costing you more in the long run.

    When to Refinance Your Auto Loan

    Choosing whether to refinance really depends on your personal financial situation. For some people, saving $15 a month isn't worth going through the trouble of all the paperwork. For others, a monthly $15 savings over the life of a long loan makes a big difference.

    The two big triggers that create potential savings are:

    • A change in your own credit score.
    • A change in rates being offered.

    Credit Score Changes

    If your credit score was low when you first received your loan, you may find that a positive change in your credit report may earn you a lower interest rate on your auto loan.

    It's always a good idea to keep an eye on your credit score, which you can order for free once a year from the main credit bureaus. Many services also offer free alerts regarding interest rate changes.

    Interest Rate Drops

    If interest rates on car loans drop, you may be able to refinance your car loan for significant savings. Keep in mind, however, that you will not typically see savings unless the interest rate drop is at least a couple points.

    Try calculating the interest rate change that would make a difference for you by using an online car loan refinance calculator.

    Auto Refinance Hurdles

    There are some cases when it's not a good idea to refinance, and some cases where it is close to impossible.

    Generally speaking, it's hard to save money when you refinance an auto loan (or get a loan at all) if:

    • The car is a few years old.
    • The car has over 100,000 miles on it.
    • The loan amount is higher than the value of the car itself.

    Since the car serves as collateral for the loan, it makes sense that lenders want the car to have value in the event they repossess it.

    However, because locking in a lower rate can change your monthly payments so dramatically, there is no reason not to shop around and see if you can find a lender that offers a better deal than what you have.

    Unfortunately, even if the car is in good shape, many people also find it hard to refinance if their credit score isn't good. Bad credit makes finding a refinance company hard, and finding good rates even harder.

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