Auto LoansAuto Refinance

When to Refinance a Car (and When to Wait)

Depending on your situation, refinancing your auto loan could really help or hinder your finances. Get a sense of your goals and determine if you’re in a situation where refinancing may help you, or explore some alternatives if you’re not.

The goal of refinancing

Natalie Brown, communications manager with Wells Fargo said, “We encourage consumers to consider the short-term and long-term impacts of refinancing.”

She said refinancing is meant to “lower interest rates, that would lead to the consumer paying less overall.” That’s one reason to refinance. Of course, you may want a smaller monthly payment and could lengthen your repayment term to do that. Both options have their perks and downsides.

If you refinance with a lower interest rate and shorten or keep your loan term, you’ll likely pay less interest over the life of the loan. So you’ll save some money, but your payment won’t go down significantly.

If, on the other hand, you need to lower your monthly payments and improve your cash flow, you may want to refinance for a longer term. This will help to reduce your monthly payment, but you will pay more interest over the life of the loan. So while the immediate impact is a manageable monthly payment, the long-term impact is you’re spending more money overall.

So your goal for refinancing could be to:

  1. Lower the total interest you pay over the life of the loan.
  2. Lower your monthly payment to improve cash flow.

Whichever situation you’re in, we’ll help guide you on how to structure your refinance.

When is the best time to refinance a car loan?

Here are a few situations when it would be wise to consider refinancing your auto loan.

You have a better credit score

Brown said, “Refinancing may be worth considering if the consumer has a better credit score.” If your credit score has improved since you initially purchased the vehicle, then it’s likely you’ll qualify for a better financing deal, which could save you quite a bit in interest over the life of your loan. For example, refinancing $15,000 from a 7% rate to a 5% rate when making a monthly payment of a couple of hundred dollars would save you around $800 in interest.

Rates are down

If you can get a better interest rate because rates have dropped, then it’s the same situation as above. A small change in rate can save you money on interest.

You want to change the loan term

Brown says another great time to refinance is when “consumers feel they’re paying too much for the current loan balance each month.” So if you need a lower monthly payment, extending the loan term is a way to do it. For example, extending a $15,000 auto loan from 48 months to 60 months will drop your payment close to $60 per month, but you’ll pay $589 more in interest. It works the other way, too. Reduce the term and you’ll increase your monthly payment while reducing the amount of interest you pay overall.

You hate your current lender

Many people choose to refinance simply because they don’t like the way their current lender does business. Rude customer service reps or poor record keeping can really sour a relationship with a lender. If you really can’t stand your current lender, refinancing with a new lender may help alleviate some of your frustrations.

The worst time to refinance your auto loan

Here are a few situations when it would be unwise to consider refinancing your auto loan.

You have an older car

If you have an older car, you may have difficulties finding a lender willing to refinance. This is because many lenders set limits on how old a vehicle must be in order to qualify for the loan. If you find yourself in a situation where you must refinance, consider taking out a personal loan or trading in the vehicle as alternative options.

You’re underwater

Finding a lender to refinance vehicle when you’re upside down on your loan isn’t easy. Even if you can find a lender, it may not be the best move.

“It really isn’t a good idea to refinance when you’re upside down,” said Bruce McClary, spokesperson for the National Foundation for Credit Counseling. “Because a portion of the loan is above and beyond the collateral, there is significant risk to the lender. So even if you can find a lender to refinance, the result is that your loan is approved with a much higher interest rate than is average.”

So when you refinance your upside-down vehicle, you end up adding to the overall cost of the vehicle. One way around this is to pay the difference in cash so you’re no longer upside down, then you can refinance at a lower rate. Even if it takes you a few months of making a few extra payments, it may be worth it in the long run. Another thing you may do is take out other financing, like a personal loan or home equity loan to help you cover the full cost of refinancing.

The car is relatively new

If you have purchased the vehicle within the last year, refinancing is probably not a good idea. The reason for this is the same as the previous situation; it’s likely that your car has depreciated in value and so you owe more than it’s worth. In addition, as rates continue to go up, it’s unlikely you’ll get a lower rate than what you currently have. In fact, it’s likely your rate will increase.

McClary said, ”The new car you just purchased is now a used car, even though it’s only two months old. So the loan you get will typically have a higher interest rate, because you’re getting a used car loan.”

McClary emphasizes the importance of making sure you can afford a new car before you make the purchase. “If you have an doubt about your ability to pay,” he said, “you’re better off not making the purchase and looking for other alternatives.”

Your loan has prepayment penalties

If your current auto loan comes with prepayment penalties in the fine print, then you’ll want to do some math to determine if refinancing is a good deal after you pay the penalties.

Should you refinance your car?

If you’re simply refinancing, and you know you’ll get a better rate and save yourself some money, it’s really a no-brainer. If you’re not sure if you’ll save any money, use this auto refinance calculator to estimate your savings.

Of course, in many cases, people refinance because they need to lower their monthly payment, usually due to some unforeseen financial crisis. Finding balance between your immediate financial needs and long-term financial health is never easy.

If refinancing your vehicle is necessary to improve your cash flow, you may refinance now to help yourself get back into a positive situation. Then, once things have stabilized, start making extra payments on your auto loan. This will assure you pay your auto loan off sooner and save yourself some interest. If you don’t, just realize you’ll be paying a lot more in interest over the life of your loan.

Speak to a credit counselor

If you’re not sure refinancing your auto loan is the right move, you may want to seek professional help, like talking to a certified counselor with the NFCC. Even though an auto loan can’t be included in a debt settlement plan, there is still a benefit to talking with a credit counselor if you’re having trouble — there are solutions that can be found using the advice of a nonprofit credit counselor that you may not be able to find on your own. You can use the NFCC locator to find a credit counselor in your area.

Next steps: Preparing to refinance

When it comes time to actually refinance your loan, there are some steps you’ll need to take. These include gathering your documentation, doing some comparison loan shopping, choosing a lender, applying, then paying off your old loan and making payments to your new lender.

Make sure you don’t go with the first offer you’re presented with. Take your time and request quotes from multiple lenders. Compare the APR, term, payment amount, fees and penalties (read the fine print) from each lender to find the best offer.  Once you make a choice, the lender will guide you through the exact process and what comes next.


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