Learn the Basics of Refinancing an Auto Loan

Are you currently making payments on a car loan? If so, you may be eligible for refinancing. It’s a financial strategy that could save you money in the long run by reducing your interest rate, lowering your monthly payments or enabling you to pay off your loan sooner.

 

What does it mean to refinance a car loan?

Put simply, it's when you take on a new loan, usually with a lower interest rate, to pay off your existing one. Refinancing an auto loan is typically not as complicated as refinancing a mortgage, but it still requires some prep work.

 

Some people opt to refinance their auto loan because it can potentially put more money in their pocket—both immediately and over time. If you think you'd like to refinance your vehicle, here are a few pros and cons you should know about.

 

What are the pros and cons of refinancing a car loan?

Refinancing is a pretty big financial decision and requires some serious thought, so let's break down the pros and cons.

 

The benefits of refinancing a car loan vary, but they generally revolve around saving you money. Here's a look at some of the most popular reasons to refinance your auto loan:

 

• Shorten the length of your overall loan. If you didn't get the most favorable terms the first time around, refinancing can shorten the length of your car loan and save you $1,000 or more.


• Lower your payments. By extending the term of your loan, refinancing can often help reduce your monthly payments by $100 or more. This strategy may be helpful for people looking to reduce expenses quickly even though you may pay more in interest over time.


• Get cash in hand quickly. If your car is worth more than you have left on your loan, you may be eligible for a cash-out refinance loan. Cash-out refinance loans not only help you save on car payments, they also put a little extra money in your wallet for savings or other bills.  

There are also a few cons to consider when thinking about refinancing a car loan:

 

• Additional fees. Some lenders will penalize you for paying off a loan early. If this is the case for you, make sure the penalties won’t cancel out your planned savings.


• Paying more in interest. As we mentioned above, extending the length of your loan may result in lower payments, but it could also mean paying more interest fees over time.


• A lower credit score—temporarily. Lenders need to check your credit before approving you for a refinance loan, which could cause your credit score to drop. It should only be a few points, though, and making your monthly payments in full and on time should offset the minimal damage.  

 

When should you refinance a car loan?

Based on the pros and cons above, here's a look at when it's wise to refinance your auto loan:

 

• When you bought your vehicle at an interest rate higher than 6 or 7%. Refinancing to a lower rate can help you save over the life of the loan. In some cases, getting your financing directly from a financial institution, instead of the dealer, can ensure the most competitive rate.


• When your credit score has improved. If you've been working to build your credit since you first purchased your vehicle, you'll likely have a higher credit score and be eligible for a better interest rate if you refinance. What better way to reward your hard work than with lower monthly payments?


• When your lease is close to expiring. Most lease deals come with an option to buy after a certain point, and refinancing can help you buy it outright. Just make sure your new monthly payments are more affordable than leasing another car.  

That being said, there are a few instances in which refinancing may have a negative impact on your finances:

 

• When you have an older vehicle. The value of a car can depreciate quickly. Lenders want to prevent you from going upside down on your loan, so they usually won't refinance a vehicle that's older than seven years or so.


• When you owe more on your car than it's worth. For similar reasons, you probably won't be able to refinance a loan that you're already behind on. If you're interested in a refinance, get up-to-date on your current loan before applying to give yourself the best chance of success.  

 

How does refinancing a car loan work?

Now that you have an idea of whether refinancing your car loan is right for you, let's dive into the specifics of how to get started.

 

First, you'll want to do your research. Look into the interest rates banks, credit unions and other companies are offering. Do the math and find out which one would save you the most money over time, or which one best aligns with your current financial needs.

 

Gather all the necessary information before you apply, including:

 

• Current loan balance, interest rate and remaining balance


• Valid driver’s license


• VIN and title


• Proof of employment


• Social Security number

 

In most cases, you won't need an appraisal of your vehicle.

 

Once you've found the best option for your situation and gathered these documents, speak to a loan officer and file the application.

 

Is refinancing a car loan worth it?

Refinancing your car is ultimately up to you. If you're looking to shorten your term length or pay a little less every month, it could be a great move. As with all major decisions, you’ll need to do the research before making any final decisions.

 

If you're still not sure about refinancing, schedule an appointment with a loan expert at Mountain America Credit Union today. Visit a branch or go to macu.com to see if refinancing is right for you.