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If you have good credit — especially if your credit has improved since you first took out the loan — refinancing is a good option. And, if you currently have a poor interest rate due to financing with a dealership, you can also benefit from improved rates even without excellent credit.
What is auto refinancing?
Auto loan refinancing is taking out a new auto loan to pay off an existing auto loan. It can help you reduce interest rates, lower your monthly payments and pay off the debt quicker — depending on what you qualify for.
When is it a good idea to refinance your auto loan?
Refinancing your auto loan is a good idea if you can get approved for more competitive rates through a new loan. If your credit score has improved since you took out your current loan, you likely can save money each month.
But it is important to consider where you are in the loan’s lifetime. If you only have a few months left or your credit score is the same as when you first applied for your current car loan, it may not help much.
Also, if you’ve already refinanced your car loan once or a few times in the past, you may not qualify for more competitive terms.
What might stop you from refinancing your auto loan?
Some circumstances can prevent you from refinancing an auto loan or mean doing so may not be the best option. You may want to hold off if:
- Your car’s mileage exceeds 100,000 or the vehicle is over 10 years of age.
- You’re upside-down in your auto loan and can’t qualify for a refinance.
- You’ll incur prepayment penalties for paying your loan off ahead of schedule.
- You’re almost done paying off the loan and refinancing means you’ll pay more in interest.
- Your credit score is too low to qualify or you’ll get a higher rate if you refinance.
How to save money with your auto loan refinance
There are a few ways to get more money back in your pocket when you refinance your auto loan.
Lower your interest rate
Depending on your credit score and loan details, you could see a lower interest rate with a new lender. A lower APR will likely save you money over the life of the loan.
Lower your monthly payments
Depending on the current terms of your loan and the details of the new loan, you may owe less each month. Extending the term will do this, but just extending the term will also increase the loan’s overall cost because you will pay more in interest.
But keeping the term the same — or shortening it — and getting a better interest rate will lower both your monthly payments and your overall interest paid.
How to refinance your car loan
Understanding the process of auto loan refinancing is just as important as knowing the benefits. Here are four steps to follow when refinancing a car loan.
1. Check your credit score and report
Before refinancing a car loan, you’ll need to check your credit score and report to ensure that your information is accurate and up to date.
If your credit score is over 670, you may get a lower interest rate — especially if your score was lower when you took out the loan. A low score will make it difficult to get a great interest rate.
The average APR for new and used car loans is 4.03 percent and 5.53 percent, respectively, for borrowers with credit scores between 661 and 780. But if your score is between 601 and 660, these rates increase to 6.57 percent and 10.33 percent.
2. Compare rates and shop around
Once you know your credit score, compare auto loan rates from several lenders. To ensure you’re getting the best rate possible, prequalify with several lenders before submitting a full application. This will also save your credit from taking multiple hits.
3. Apply and get the auto refinance loan
After you’ve found the best rate, you can complete the application online, over the phone or in person — depending on the lender. Be sure to review all of the terms before signing.
4. Pay off your current loan
You will either receive a check or the new lender will pay off your existing one. Continue making payments on your existing loan until you have verified it is completely paid off.
The bottom line
Refinancing your auto loan can save you money if you are paying a higher rate than the current market. But only refinance if it will save you money. If lowering your monthly payments through refinancing would require extending your loan term, you may want to look into other options.