Refinancing does start your auto loan over — but it is not a complete reset button. By refinancing your loan you sign new loan terms and rates with the intention of saving you money. But the choice to refinance is not a quick solution to a larger financial problem.
How much refinancing restarts your car loan
If you decide that refinancing your loan is the best financial option for you, you must remember that it is not a complete fresh start. Rather, the new terms offered will make it easier to pay off your loan.
How refinancing affects your loan term
The most common terms that drivers are met with when financing a vehicle range from 24 to 84 months. The longer your term, the lower your monthly cost will be. But the lifetime of your loan will be stretched. This means you could be stuck with the same vehicle for as long as seven years.
When refinancing your loan, the term length is likely what you will be primarily adjusting. Although you can get a different interest rate as well, the change in term will be at the forefront. The term can be shortened or made longer — and the right choice is dependent on a few factors. To best determine your ideal term length, take advantage of an auto loan refinance calculator to find the one that will best balance money saved and monthly payments you can afford.
When it’s a good idea to refinance your car loan
There are a few primary scenarios where it is a good idea to refinance your car loan.
The first is if you are struggling to afford your monthly payment. By refinancing, and thus reworking your current loan, you can potentially give yourself more time to pay off the cost of the vehicle. But you may be able to request a loan modification from your current lender without refinancing. Don’t jump to refinancing if the terms you would get aren’t better than what you could have if you stick with your loan as it is.
Another situation where refinancing is the right road to take is if your credit has improved since you initially got your loan. Better credit will mean more favorable terms. This is especially true if you originally financed through a car dealership.
How to refinance your car loan
If you determine refinancing is right for you, the steps take some reflection of your current loan and organization of paperwork for your new loan application.
- Review your current loan. Find the interest rate, payoff amount, months remaining and information about any fees or penalties.
- Check your credit. Make sure your credit score is in good enough shape to get a decent rate. Check your credit report for errors at the same time.
- Compare lenders. Don’t go with the first lender that offers a decent rate. Review several, including their eligibility criteria, penalties and what rates and terms you prequalify for.
- Apply for refinancing. Once you decide on a lender, apply online or in person.
The bottom line
Refinancing your auto loan does not completely start it over. But it can lower your interest rate and save you money on a month-to-month basis. Consider the risks that come with refinancing and look for other ways to save money before signing a new loan application.