Pros Of Refinancing An Auto Loan
- Lower interest rate: One of the best reasons to refinance a car loan is to lower your interest rate. A lower interest rate can help you save money on the cost of the loan over time. If you previously had bad credit or even no credit and your credit has since improved, it can be worth looking into refinancing your auto loan to see if you may now qualify for a better interest rate. Or, rates in general may be lower than when you originally purchased the vehicle. If the rate you could qualify for is 1% or more lower than the rate you are currently paying, consider refinancing. A significantly lower interest rate will help you pay your loan off faster.
- Lower monthly payments: If you need to free up more room in your monthly budget, refinancing your auto loan can help you reduce your monthly expenses by extending the loan. Lengthening the life of the loan by 1-2 years can significantly lower your monthly payment. Even though it will take longer to pay off the loan in the long run, and you will pay more interest over the life of the loan, it will give you the needed wiggle room in your monthly finances in the short term.
Apply To Refinance Your Car Loan
Keep in mind that if you have multiple hard credit checks within 30 days as you shop for a new auto loan, FICO will count them as a single inquiry. That means rate shopping wont impact your credit report more than once. Financial institutions such as banks, credit unions, and online lenders provide auto refinancing, and many have online loan applications.
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How To Evaluate If Refinancing Your Car Is A Good Idea For You
Have a clear goal. Do you want to lower your monthly payment, get cash for an emergency or pay your loan off sooner? Knowing what you want to accomplish can help you when applying to refinance and running numbers.
Get refinance loan offers.Shop several refinance lenders to find out what interest rate you will qualify for with various terms.
Run the numbers. Use our auto loan refinance calculator to compare your current auto loan with refinance loan possibilities and see how it will affect your monthly payment. You can also see how much refinancing will cost or save you in total, including interest.
Its always a good idea to weigh the pros and cons of refinancing your car beforehand. Even if your goal is simply to get emergency cash, you should still read the fine print and know the overall cost you’re committing to.
About the author:Shannon Bradley covers auto loans for NerdWallet. She spent more than 30 years in banking as a writer of financial education content.Read more
Refinancing A Car: What Are The Pros And Cons

Many or all of the products featured here are from our partners who compensate us. This may influence which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list ofour partnersandhere’s how we make money.
The benefits of refinancing your car loan can include lowering your monthly car payment, reducing the interest you pay or shortening your loan term.
The downsides to auto loan refinancing can include fees, additional interest if you extend the term or cash out equity, and the risk of owing more than the car is worth.
Here are the pros and cons to consider.
Also Check: Usaa Refinance Auto Loan Rates
You Dont Like Your Current Lender
Money isnt the only reason to switch to a new lender. Maybe you had a bad experience with your current lenders customer service, or perhaps your lender was bought by a larger institution and is changing the way it does business. Maybe youd prefer to be a member of a credit union rather than a customer of a commercial lender. Whatever the reason, refinancing your current auto loan can help you find a lender that works for you in addition to saving you money.
Wait Until You Understand How To Refinance A Car Loan
Refinancing your auto loan means that you apply for a new loan. When you refinance, your loan essentially starts over. Your new loan will come with new loan terms, including a new interest rate and loan repayment term.
Before you can refinance your auto loan, youll need to collect all of the necessary paperwork. This can include your:
- Drivers license
- Title
- Cars information
If your credit score is in the low 600s or lower, or if you have missed payments or have other issues with your credit history, you may need to provide credit card or other loan statements to show that youre able to pay your bills.
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How To Compare Car Loan Refinance Offers In Canada
Youll want to compare the following features of your refinance loan to make sure its a good fit for you:
- Loan amount. Make sure that the lender you choose can give you enough money to pay off your current car loan as well as any fees youll have to pay for closing early.
- Interest rates. Double-check that the rates youll pay with the new lender are lower than what youre currently paying to guarantee that youll save money in the long run.
- Fees. Find out what fees your new lender will charge you to set up and maintain your loan as well as what penalties you might incur to pay it off early.
- Repayment flexibility. Learn more about the lenders policies for handling late payments or changing repayment dates to accommodate your cash flow.
- Reputation. Make sure the lender you want to switch to has positive online reviews and a good reputation for customer service.
Use the car loan calculator below to find out how much you might pay in monthly payments with a new rate and/or loan term.
Wait To See What It Will Cost You
Most of the time, an auto refinance loan doesnt come with closing costs like origination fees or processing fees. You may need to pay a title fee, but that usually doesnt cost more than $100.
However, your existing loan may include a prepayment penalty. Prepayment charges can vary from a fixed fee to paying off all of the remaining interest on the loan. Check and see if your loan comes with a prepayment penalty. If it does, make sure the fee doesnt cancel out what youd save by refinancing.
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What Does Refinancing A Car Loan Mean
Refinancing your car loan means you replace your existing car loan with a new one in order to lower your monthly payments or decrease how much interest you pay throughout the life of the loan.
These are some basic reasons why people may refinance a car loan:
- To lower their monthly loan payment
- To lower their interest rate
- To shorten their loan term
- To extend their loan term
Refinancing is an easy way to improve your car loan situation, but it’s not right for everyone. It depends on your financial situation, your current loan terms, and more. Before we talk about how to actually get started, let’s start by determining whether it’s even worth it for you.
Ready Set Explore Your Options
The best way to figure out whether you should refinance your auto loan or buy a house first is to start comparing different scenarios. You might be able to speak with lenders and pre-qualify for loans with just a soft inquiry that doesnt affect your credit. Based on the preliminary offers you get, you can make a decision on what will be the right move for you.
Ready to refinance your car loan?
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Things To Watch Out For When Refinancing A Car Loan
Just like with any financial arrangement, it is important to keep your eyes out for red flags. Ensure that the lending agency is reputable and offers a reasonable interest rate. Make sure that you are dealing with a proven institution and be sure to read all the fine print. If you are unsure as to the meaning of a phrase, it is better to ask.
Take a look at the cost of refinancing the vehicle. Are there any upfront expenses? Are you going to be paying more down the line? If so, how much more? Make sure that you have all of the information above before making your decision. As always, avoid deals that seem too good to be true. Understand your rights and the responsibilities of the lender. Be certain that you are comfortable with the arrangement and that it is in your best financial interests.
Reduce Your Interest Rate

One of the best reasons to refinance a car loan is if you have an opportunity to reduce your interest rate. If you previously had no credit or bad credit, it is worth checking into refinancing your car loan after a couple of years to see if you receive better offers. Your credit score may have improved enough to qualify you for a lower interest rate. With a lower interest rate, you will be able to pay off your loan faster or lower your monthly payment while paying it off at the same pace. In either case, you’ll pay less over the life of the loan.
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Home Appraisal Vs Vehicle Bookout
Both types of refinancing involve an appraisal which will determine the current market value of the property.
The appraised value of your home or car is important because its used in calculating your loan-to-value ratio, or LTV. Its a percentage calculated comparing your loan balance to the propertys value.
To lenders, a lower loan-to-value ratio poses less risk to them. Because you owe less on your loan than the car or home is worth, that positive equity makes it easier to recoup any potential losses .
How much is your current car loan balance?
What’s your car’s current value?
A loan-to-value ratio over 100% means you owe more on your loan than your vehicle is worth. An LTV over 125% can make it harder, but not impossible, to qualify for a refinance loan.If your LTV is less than 100%, your car’s value is higher than what you owe on your loan. The lower your LTV, the better.
What Is Trading In A Car
Trading in your car is when you switch out your current vehicle for a new one. Sounds exciting, doesn’t it? It could be the perfect decision for you depending on your financial situation and what you are looking for in a car.
There are many reasons you may want to trade in your car but before you do that you need to do a little bit of homework first:
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What Is Car Refinancing
Like refinancing a mortgage for a home, car refinancing involves taking out a new car loan to replace an existing one. The main reason to refinance your car loan is to take advantage of a lower interest rate or better terms in order to reduce your monthly car payments.
For instance, lets say the current interest rate for car loans is much lower than the rate youre currently paying on your existing loan. By refinancing, you can secure a lower rate, which will reduce your monthly payments and help you save on interest. When refinancing you may also be able to increase the length of your term which can also help lower your car payments.
Should I Refinance My Car
You should refinance your car if you want to keep it and change your car payment.
Refinancing your car could lower your interest rate.
A small percentage-point change in interest can help you save a lot of money over the life of the loan. Use an auto loan refinance calculator to see how much you may save. The factors lenders consider favorably are whether:
- Your credit score and/or income has increased since you originated your current loan
- You have positive equity
- You add a cosigner who has a good credit score or income
Refinancing could lower your car payment.
A lower APR could reduce your monthly car payment by itself, but another way to lower your payment is to extend the loan term. If you have three years left on your auto loan and you refinance it to a four-year term, your payments could decrease. Be careful with this option, however. The longer the loan term, the more money youll pay in interest over the life of the loan. Here are the current lowest auto loan refinance rates. Potential lenders include your local credit union, bank or an online lender.
Heres how different APRs and terms affect the payment on a $21,000 auto loan:
How APR and term affect monthly payment and total interest |
$4,548 |
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How Can You Refinance An Auto Loan
Each lender has its own process and requirements for refinancing auto loans. However, the steps to refinance are generally similar to taking out an initial car loan. Heres what the refinance process looks like:
Your Credit Score Has Improved
Your credit score is very important in car finance, as auto lenders sort applications by credit tiers. The APR you get, as well as whether you even receive an offer, are both largely determined by the credit tier youre in. If your credit score has improved since you initially purchased the vehicle and youve moved up a tier, then its likely youll qualify for a better financing deal. Heres how you could improve your credit score.
Getting a better APR could save you quite a bit in interest over the life of your loan. For example, refinancing $15,000 from a 7% rate to 5% when making a monthly payment of a couple of hundred dollars would save you around $800 in interest.
Heres how much you would pay in interest over the life of a 5-year loan if you borrowed $25,000, based on the APRs for closed auto loans by credit score on the LendingTree platform in the first half of 2021.
Lifetime Interest Charges on a $25,000 Loan |
$11,733 |
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You Should Refinance Your Car If:
Refinancing has a number of benefits. Here are some of the best reasons to refinance your car loan:
You Want A Lower Rate
If your current loan is tied to a much higher rate than whats being offered today, refinancing can help you take advantage of these lower rates to bring down your monthly payments.
Your Financial And Credit Profile Has Improved
If your finances are in better shape today, you may be able to qualify for a lower interest rate, which can save you money on the interest portion of your monthly car payments.
Maybe you got a raise at work, increased your , or paid off a lot of your existing debt. Whatever the case may be, a healthier financial profile can put you in a better position to get approved for a lower rate, thereby reducing your monthly payment amount.
Low Or No Early Prepayment Penalty
If your current auto loan contract does not include a clause that requires you to pay a penalty fee for breaking your loan early, then refinancing may be a great option. If it does have a penalty fee, refinancing can still be a good option. Simply make sure that the savings you get from refinancing are higher than the early prepayment penalty fees.
Find out if you can refinance your car loan under someone elses name.