Should I Refinance My Car Loan?

Capital One

Originally published on June 3, 2018

Article QuickTakes:

• In what situations should I consider refinancing my auto loan?
• When should I refinance my car loan?

You’ve probably heard of people refinancing home loans, but did you know that car loan refinancing also exists? Refinancing your car loan could be a great way to get a lower interest rate that saves you money monthly and over the life of your loan, often without extending your term length.

WHAT DOES REFINANCING A CAR MEAN?

When you refinance your car loan, your new lienholder:

1. Pays off your current lienholder
2. Takes over your loan
3. Provides you with new financing terms in place of your original agreement

SHOULD I REFINANCE MY CAR LOAN?

Before applying for an auto refinance, you should determine whether or not it’s right for your situation. Many lenders offer helpful calculators for you to see the numbers on your current loan, how changing your rate and loan term could impact your payment, and the amount of interest you may pay. There are also options for pre-qualifying — a process in which you enter some basic information about you and your loan to check for custom offers and potential savings without impacting your credit score.

Some general instances in which you might refinance a car loan may include:

• An increase in your credit score since taking out your auto loan
• Discovering that you’re qualified for better financing terms than what you currently have; for example, through shopping around and finding out that you can likely get a better rate
• Your monthly car payments are higher than what you’re comfortable paying
• If the terms of your current loan don’t allow you to make additional payments to pay off your loan faster, refinancing your term length is another option

If any of the above applies to you, then it could be time to look for a lender to apply for refinancing. On the other hand, there are certain scenarios in which refinancing a car loan may not be quite as helpful, including if:

• Your car is more than 7 years old
• You’ve already paid off a significant majority of your existing car loan
• You have no car loan
• Your interest rate is already low or at 0%

Each bank or lending institution will have its own requirements on whether they can offer you refinancing. Make sure you read all of the conditions for a particular lender if you’re considering to refinancing the loan on your vehicle.

WHEN SHOULD I REFINANCE MY CAR?

In most cases, the earlier you’re able to refinance, the better. Once you get those lower rates, you’ll be able to spend less on your monthly payments, saving you more money. Keep in mind that even a small interest rate reduction could result in significant savings over the life of the auto loan.

By knowing whether refinancing your car will benefit your particular situation, you can make a big step towards improving your financial health.