Should you refinance your car loan?
Borrowers refinance auto loans for different reasons, and you most likely have a specific goal in mind. You may want to refinance at a lower interest rate to save money or shorten the term of your loan to pay it off sooner.
If you’re having trouble making your monthly car payment, you may want to extend the term of the loan to lower the payment. But be aware that this may result in paying more interest over the life of the loan.
An auto loan refinance calculator can help you try out different rate, term, and payment scenarios.
» Try our Auto Loan Refinance Calculator
When does it make sense to refinance a car loan?
If your credit has improved. If you’ve made regular, on-time payments for six to 12 months since getting your car loan, and the lender has reported those payments to the credit bureaus, you may now qualify for a lower interest rate.
If a car dealer has marked up your interest rate. When you got your original loan, the car dealership may have charged you a higher interest rate than you might have qualified for elsewhere — or you could still qualify with a refinance.
If you can’t track payments. Refinancing to extend the term of the loan can reduce your car payments, but don’t take this step lightly. Extending the term of the loan means you’ll pay more interest and more in total over the life of the loan, but it’s still a better option than missing payments or facing repossession.
If interest rates fall. If car loan rates generally drop lower than when you got your car loan, refinancing could be an opportunity to take advantage of these lower rates.
Another reason to refinance a car is to remove a co-borrower from an existing car loan.
What happens when you refinance a car loan?
The process of refinancing an auto loan is simple. You apply for an auto refinance loan or auto refinance loan, just like you would any other type of auto loan. Typically, you will need to apply to a new lender, as few lenders will refinance their own loans.
You will be able to choose the duration of the new loan. This can be the same as the number of months remaining on your current loan, or you can shorten or extend it. The terms available from auto refinance lenders vary, but a range of 24 to 84 months is the most common.
Extending the term of your auto loan when you refinance will lower your monthly payments, but you’ll pay more interest over the term of your loan. It can also put you at risk of owing more than your car is worth, known as be upside down on your car loan.
When you are approved for an auto refinance loan, it provides funds to pay off and replace your current auto loan. In most cases, your refinance lender will take care of paying off your current loan. You then start making monthly and hopefully lower payments on the new loan.
The final step in refinancing is to have a new car title issued to replace the lien holder (lender who has your loan) with the new lender. Many lenders will handle the transfer of title for you. In some states, you may also need to re-register the car.
When is the best time to refinance a car loan?
Some lenders will refinance an auto loan as soon as you can provide information about your existing loan and lender. If you settled for an extremely high auto loan rate to evade a dealership and you have good credit (FICO score of 690 and above), refinancing to a lower rate as soon as possible may be a good idea.
On the other hand, if your blemished credit history has resulted in a high auto loan APR, you could wait six to 12 months and continue to pay off your existing loan. You typically need six to 12 months of on-time payment history, with no new negatives on your credit report, to make auto refinancing attractive or even possible with some lenders.
Who are the best auto loan refinance lenders?
The best auto refinance lender for you may be different from the “best” for someone else. The higher your credit scores and the stronger your credit history, the more choices you will have from lenders with lower rates.
Almost all banks and credit unions, known as direct lenders, offer auto loan refinance. Your current bank or credit union might be a good place to start, especially if they offer a rate reduction for automatic payments.
Online loan marketplaces that work with a network of refinance lenders are another option, and some specialize in auto loan refinance. They offer the convenience of applying to many lenders with a single loan application, but this can also lead to receiving calls, texts, and emails from multiple lenders.
Lenders have different limits for the mileage and age of the car, as well as the minimum amount a person can borrow, so make sure your needs match a lender’s requirements before applying.
Applying to multiple auto refinance lenders and comparing offers gives you the best chance of finding the lowest rate loan with the shortest term. Make sure all inquiries are submitted within two weeks, so that any serious credit inquiries are counted as one and have less of an effect on your credit scores.
Can you refinance a car loan with bad credit?
Refinancing your auto loan can be tricky if you have bad credit, but it’s still possible. Some lenders have minimum credit score requirements as low as 500. NerdWallet’s auto loan refinance lender reviews show the minimum credit score for most.
But if your bad credit hasn’t improved since you got your original loan, you’ll probably have trouble finding a lender willing to refinance at a lower rate.
If you’re having trouble making car payments, talk to your current lender right away (before you miss any payments). Some lenders have options to help you that don’t require refinancing.
Can you get money back when you refinance a car loan?
If your car is worth much more than you owe it, some lenders allow what is called automatic refinancing. You borrow more than you owe on your current loan, repay that lender, and take the rest in cash.
Interest rates for cash refinance can be lower than for a credit card or personal loan because the loan is secured by your car. But overborrowing against your car comes with risks. If your car is sold out or you eventually want to sell it, you may not receive enough from the insurance or buyer to pay off your loan balance. You would then be responsible for paying the rest of the loan.