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Refinancing a car can bring benefits, but it’s not always the right move. Before you consider refinancing, be sure that you understand the pros and cons, the details of your existing loan, and the factors that determine when you should refinance your car loan.

Let’s look at some factors you should consider.

When You Should Refinance Your Car Loan

Refinancing is logical if you have a clear idea of what you expect to earn from refinancing, and you have a good chance of achieving this goal. Here’s when it makes sense to refinance your car loan.

1. When Your Credit Score Has Improved

Your credit score is very important in automotive finance, as car lenders use it to evaluate your ability to repay and set your interest rate.

Suppose your credit rating has improved since you purchased the vehicle. In that case, you will likely be eligible for a better financing arrangement than you have on the original loan. Even a 1% reduction in your rate can save you a significant amount of money.

2. When You Want a Lower Monthly Payment

If you are struggling to make your monthly payment, you may be able to lower it by taking out a refinancing loan with a longer term. Note that the extension of the duration of your loan decreases your monthly payment but also increases the amount of interest you will pay over time. This generally only makes financial sense if you can also improve the interest rate on your loan.

๐Ÿ“š Read more: Learn more about long-term auto loans and how they can affect your finances.

If you are struggling to make your payments consider all options, including selling your car and buying a cheaper one.

3. When You Want to Pay Your Loan Faster

You can also refinance to a loan with a shorter term. If your income has increased and your credit score has improved since you got your car loan, a shorter-term loan will pay off your loan faster, keep you from going upside-down on your loan, and save you a substantial amount in interest payments.

4. When You Dislike Your Current Lender

Some people refinance because they dislike how their current lender does business. Rude customer service representatives and poor record-keeping can damage a relationship with a lender. Refinancing with a new lender can help ease some of your frustrations. This usually only makes sense if you can also reduce your interest rate or gain other benefits.

5. When You Want to Remove a Cosigner

When you got your car loan, you may have needed a cosigner to get approved or to get a better rate. If your credit record has improved, you may be eligible for your own loan. Cosigning a loan is a substantial obligation, affecting the cosigner’s debt-to-income ratio (DTI) and their ability to get other loans. If your cosigner wants to apply for a mortgage, for example, your loan could be a real obstacle.

Some lenders will remove a cosigner, but in many cases refinancing is the only way to set your cosigner free.

6. When You Have Positive Equity

You may get a better auto refinancing rate if you owe less than your car is worth. To find your loan-to-value ratio, contact your current lender, specify how much you owe, and then divide it by the value of your car. Your loan will be smaller than the original one because the vehicle’s equity will reduce the amount you need to borrow. You get a lower interest rate.


Advantages of Refinancing Your Car Loan

These are some of the reasons why you might want to refinance a car loan.

โž• You May Pay Lower Interest

If you had bad or no credit when you purchased your vehicle and your credit has improved since then, you may qualify for a lower interest rate. This is particularly true if you have always paid on time: most auto lenders use a special FICO score that puts a high weight on car payments.

In an environment of rapidly rising interest rates, you will need to have a substantial improvement in your credit score to gain a superior interest rate.

โž• You Can Reduce Your Monthly Payment

Refinancing may reduce a monthly car payment that is too big for your budget. A lower payment may free up funds to repay other higher-rate debts. It can also help you cope with periods of financial hardship, such as a sudden drop in income.

To see a substantial reduction in payment, you will have to lengthen the term of your loan, which will increase your total interest payment and could leave you upside down on your loan.

โž• You Could Repay Your Loan Earlier

If you have increased your income since purchasing your car, consider refinancing your car loan on a shorter-term basis to pay it off sooner. Of course, you could go the way of paying extra on your existing car payment each month, but refinancing could help discipline you to increase your payment amounts.

โž• You Can Tap Your Equity in Your Car

You may be able to borrow with an automatic liquidity refinancing loan. You use your equity in your car (the value of your vehicle less the amount you owe on it).

๐Ÿ‘‰ For Example

So, if your car is valued at $20,000 and you have $5,000 left to pay on your loan, you can get a refinancing loan for $10,000 and take $5,000 in cash. Choose this solution only in the event of a financial emergency or if you have a strategic plan to use the money to pay down a high-rate debt. There are fees involved.

See if you have several advantages to refinancing at the same time, and this may make your decision easier.


Disadvantages Of Refinancing Your Automobile Loan.

Here are some reasons you may not want to refinance your car.

โž– You Might Not Get a Lower Interest Rate

As of November 2022, interest rates are higher than they’ve been in years. Until they come back down it may be difficult to get a better rate even with better credit.

โž– You Might Pay More Interest

If you’re refinancing at a longer loan term to lower your monthly payment, you can pay more overall due to the extra months of interest. A reduced rate may not compensate for the cost of maintaining interest payments for another year or two.

โž– You May Incur a Penalty

Your existing loan may carry a prepayment penalty designed to protect the lender from losing revenue if you refinance. Prepayment penalties are designed to make refinancing unprofitable, and if your loan has one it generally won’t be worthwhile to refinance.

โž– You Could Wind Up Upside Down

Refinancing to extend your term could leave you owing more than your car is worth. This is called being upside down on loan. If you decide to sell your vehicle, you must pay the lender the difference, which could be in the thousands of dollars.

โž– You Could Already Be Upside Down

If you owe more than your car is worth, it’s generally not a good idea to refinance a car loan. Lenders generally won’t lend more than the car is worth, so you’ll have to add cash to close the deal. It’s usually not worth it.


How to Determine if it is Time to Refinance

There are several steps to figuring out if refinancing is right for you. Don’t skip any steps, and you will have everything you need to make your decision.

1. Review Your Credit Score

This will help you navigate to your eligible lenders and predict possible rates. Even those with poor credit may be able to get a loan by finding the right lender.

๐Ÿ‘‰ Tip: there are many ways to get a free credit score. Remember, though, that many auto lenders will use your FICO Auto Score, which may not be the same as the credit score you get for free. The only place where you can get your FICO Auto Score is MyFICO.

2. Know Your Loan

You won’t know if refinancing will get you a better deal unless you have a clear handle on the terms of your existing loan. You should know your remaining loan balance, the loan term, your payoff amount (the amount you’d have to pay to clear the loan right now), the interest rate, and whether your loan has a prepayment penalty.

3. Know Your Car’s Value

Before you set out to refinance, know what your car is worth. That will let you calculate your equity in your vehicle and know whether or not you are upside down on your car loan. You can get an estimate from Kelley Blue Book.

4. Get Prequalified With a Minimum of Three Lenders

Borrowers who shop around consistently get better deals than those who take the first deal they are offered.

Look for lenders who will prequalify based on a soft inquiry. If a lender won’t do that, keep all your applications within a 15-day period to avoid running up multiple hard inquiries.

Always consider a loan from your own bank or a lender that you already do business with. Some lenders offer discounts for existing customers.

Prequalification is not a guarantee, but it’s a good indication of the terms you will get.

๐Ÿ† Check out our list of the best low-fee refinancing options available nationwide. These options all offer an online application process and APRs well below the current national average: Best Auto Refinance Companies for Low Interest Rates

5. Compare Loans

Select the best prequalifying offer and compare it to your existing loan. Keep your refinancing goals in mind and decide whether the best offer achieves those goals.

Use the refinance calculator below to see how much you could save by refinancing your car loan.

These steps will help you to decide whether refinancing will meet your goals. If it won’t – or even if you’re not sure – it is probably easiest to stay with your existing loan.