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The pros and cons of auto loan refinancing
Refinancing could lower your monthly rate and save you hundreds of dollars.
If you’re unsatisfied with your car loan interest rate, loan terms, or monthly payment, then refinancing your auto loan could help you reduce monthly expenses. But before you take the plunge, it’s worth taking a beat to consider the pros and cons of auto loan refinancing.
Will you save money on interest or end up paying more? Are the early termination fees on your existing loan worth the money you’ll be saving on interest? These are just some of the questions we’ll consider so read on to figure out if refinancing is right for you.
|Min Credit Score
|2.74% to 27%
|500 Min credit score
|2.84% to 21.99%
|600 Min credit score
|3.99% to 24.99%
|510 Min credit score
|2.99% to 21.99%
|640 Min credit score
On Consumers Credit Union’s
|3.49% to 8.34%
|660 Min credit score
Reasons to refinance your auto loan
There’s not necessarily a right or wrong time to refinance, however, here are a few indicators when you might be able to get a better rate.
1. Interest rates have dropped
Have market interest rates gone down since you originally bought your car?
Whether you bought your car new or used, it could be worth refinancing if interest rates have dropped. For instance, a $15,000 loan at 5% interest (60-month term) will cost you about $1,984 over the course of the loan, with monthly payments of $283.
At 2.5%, though, your monthly payments drop to $266 and the loan ends up costing you only $973 over the life of the loan. That’s over $1,000 in savings!
|Amount of loan
|Interest (60-month term)
2. Your credit score has improved
Better credit scores translate to lower financing rates. Even a small decrease in your interest rate could result in big savings over the course of your loan term.
So if you’ve been making your car payments on time since you first purchased your car for a few months to a year (as well as your other payments), your credit score has likely improved.
3. Your income has changed
Has your income increased or decreased significantly?
If you’ve had a few financial setbacks since purchasing your vehicle, you may be able to lower the amount of your monthly payment by refinancing and extending the loan term.
On the flip side, if your income has gone up you may want to refinance with a shorter loan term to pay off your debt faster.
4. You’d like to remove your cosigner
You can refinance your loan after time to remove a cosigner.
The refinance process essentially gives you a new loan and a new contract, making it easy to add or remove people from the loan.
5. You need some extra cash
If money’s tight, you might want to refinance and take equity out of your car. For instance, if you car is worth $19,000, and you still owe $7,000 you could get a refinance loan of $10,000 and get $3,000 in cash.
The pros to auto loan refinancing
Pay less interest
Whether your credit has improved, or interest rates have dropped, refinancing a loan to a lower interest rate can save you hundreds of dollars.
This can be especially true if you’ve been making on-time payments consistently for a 6 to 12 month period. Perhaps when you first bought your car you could only qualify at a higher interest rate, now that you’ve proven you’re a good risk, lenders will be more willing to give you a better rate.
Lower your monthly payment
If your car payment is eating up your monthly budget – refinancing to a lower monthly payment can really help. If you’ve experienced an income drop this could be a great way to avoid using high interest credit cards to pay for basics like food and utilities.
Extending the life of your car loan or lowering the interest rate can both help lower your monthly payment.
Going with a longer term loan may mean that you pay more interest over time, but if it helps you keep up with your payments or keep you out of credit card debt it is probably worth it.
Tap into your car equity
If your cash-strapped, refinancing is one way to get access to cash.
Pulling out equity on your car is a great way to help pay down high-interest credit card debt or just tide you over during financially tight times.
Early auto loan payoff
If your financial situation has improved you might consider refinancing to a loan with shorter terms and lower interest to pay it off sooner. The benefit of this over just making extra payments on your existing car loan is that more of your payments will go towards the principal owed.
The cons to auto loan refinancing
Loan fees and more
Most lenders charge an application fee as a part of providing you with a loan. It’s a one-time fee and hopefully the only thing you end up getting charged. But – here are three other types of fees you’ll want to watch out for.
Title transfer fees
Some states have a title transfer fee to cover the cost of transferring the title from the old lender to the new.
Early termination fees
Some car loans have fees for paying off your loan early so make sure and read the terms of your loan or call your lender to make sure there is no penalty for paying it off early.
Some states may charge a registration fee when refinancing a loan.
May end up paying more interest
If you’re looking to reduce your car payment with longer terms, you could end up paying a higher interest rate than your current loan. Even if your interest rate is lower, paying over a longer period of time will end up costing more money.
End up upside down in your loan
If you refinance to pull cash out of your loan you might end up owing more money on your car than it is worth. If you decide to sell your car or use it as a trade in you could still end up paying money on the loan.
How to apply for a car refinance loan
There are just a handful of steps to apply for a refinance loan — most of the time it can be done online within two hours. The process generally includes:
Evaluate your credit
You’ll likely need a score above 500 to qualify.
Review loan terms
Don’t forget to read the fine print. Early termination fees or penalties should be avoided.
Have important information handy
Things like proof of employment, proof of residence, and vehicle information should be close by once you start the application process.
Apply online directly to lenders to see your actual terms, which vary based on your credit history and other factors.
Get at least 3 different quotes
Always get more than one quote! Use a marketplace sight like MyAutoLoan for easy comparison shopping!
Sign your loan and start saving money!
Make sure to follow through with document signing and anything else your new lender requires before you head out on the road to enjoy your new monthly savings!
Your new lender, the refinance company, will pay off your old loan and you’ll begin making payments to your new lender at the lower rate.
While there are many details to take care of, the entire process can be completed in a few hours.
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