5 ideal situations to refinance a car loan

3 min read

When you’ve gone through the effort of getting a car loan, it can be tempting to simply pay it off and never look back. Before you engage the cruise control, though, consider the potential benefits of a refinancing an auto loan.

People typically refinance an auto loan because they’ve found a better interest rate, which would result in them saving money. But there are other situations when refinancing would make sense. The key is keeping an eye out for any of the five following situations and being prepared to act.

  • Situation 1: You see interest rates dropping. Interest rates on all sorts of consumer loans periodically rise or fall, influenced largely by the monetary policies of the Federal Reserve. The Fed has raised interest rates three times in 2018, but history shows that reductions will eventually come around. When they do, be ready to look for your opening.
  • Situation 2: You want to improve on a “dealer-sourced” loan. If you financed your car through the dealership, you likely got a higher interest rate than you could have thanks to something called a dealer markup. A dealer’s preferred lenders commonly charge higher rates, and part of difference goes back to the dealership. Compare your current loan with offers from other sources (your bank or credit union, an online lender, etc.) to see if you can get a lower interest rate with a refinance car loan.
  • Situation 3: Your credit score has improved. All those months of diligently paying off your current loan can have a positive effect on your overall creditworthiness. Lenders typically see a good credit score as a sign of a less risky borrower, which in turn can lead to offering better interest rates. If your credit score has improved since you took out the loan, you might be able to save money on interest through a refinance. You can check your credit for free on Bankrate.
  • Situation 4: You want to buy the car you’re currently leasing. Car leases typically include an option to buy at the end of the lease. You can get a refinance loan to buy the car outright when your lease expires, although this approach has its pros and cons. If you want to save money on a lease-to-purchase, you’ll need to make sure that the total cost of buying the car, including interest on your refinance auto loan, would be lower than extending the lease or leasing a different car.
  • Situation 5. You need lower monthly payments. Sometimes refinancing a car loan is a life preserver, not a windfall. If you run into financial trouble and want to reduce your car payment, you could refinance a loan with a longer term (from 36 months to 48 months, for instance). Although you would pay less per month, expect to pay more total over the life of the longer loan.

How to track refinance interest rates

Most refinance opportunities involve taking advantage of a better interest rate. If you find an interest rate substantially lower than what you’re paying on your original loan, it could be time to get a new deal with a refinance car loan.

One easy way to keep an eye on interest rates is by checking the Bankrate auto loan lender marketplace, which includes current offers on refinance car loans.

Also, Bankrate’s Auto Refinance Calculator lets you compare your current loan with a new offer side-by-side. Just enter a few pieces of information, including your current monthly payment and the balance you owe, to see how much you could save by refinancing.

When is refinancing a bad idea?

In some cases, refinancing may not make good financial sense for either you or the potential lender. Those situations include:

  • When you’re well into paying off your current loan. Through the amortization process, your interest charges gradually decrease over the life of the loan. As a result, a refinance has more potential to save money when you’re in the earlier stages of repaying the original loan.
  • When you’re trying to refinance an older or high-mileage car. Most lenders won’t find it worthwhile to issue a loan on a car that has significantly depreciated in value.
  • If you’re “upside-down” on the original loan. Lenders typically avoid refinancing if the borrower owes more than the car’s value (also known as being underwater).

Let smart shopping drive the decision to refinance

If you’re wondering how to refinance a car, the process isn’t that different from buying the car itself. You’ll want to shop around for a good deal and take a couple of test-drives (in this case, with the Auto Refinance Calculator).

If everything falls into place, you could be looking at a more financially comfortable ride.