Should I Refinance My Car Loan?

Refinancing = paying off your old car loan with a new loan from a new lender. You can save a lot of money by switching to a better loan. And the longer you wait, the more money you’re wasting on interest. In this post, we’ll explain when it makes sense to refinance and when it doesn’t.

Three quick things to know about refinancing:

1. It’s not too late.

Many people get lousy loans at the dealership: their interest rates are too high, or they were charged crazy prices for protection products. You can save money by refinancing to a loan with a lower interest rate or lower your monthly payments. Refinancing can also give you the opportunity to cancel, replace, or add better products at lower prices.

2. Borrow for as few months as you can afford.

As with any loan, low monthly payments are nice, as long as they don’t last forever. The best of both worlds? A low interest rate and a shorter loan term. It can be tempting to extend your loan term when you refinance to lower your monthly payment, but keep in mind that longer terms usually means higher interest rates, which means you’ll end up owing more money over the life of the loan.

3. Consider protection products – they’re valuable – if fairly priced.

Your new lender may allow you to add protection products like Vehicle Service Contracts (VSCs, aka extended warranties) and GAP Waivers to your new loan. These can protect your car and your pocketbook from expensive surprises. Learn about how you can own smarter with Protection Products.

Consider refinancing your auto loan when:

Oops, you got the wrong loan at the dealership and you want to do better
Your credit score has improved (congrats!) and you qualify for better terms
You need to lower your monthly bills with a longer loan term
You want to borrow more against your car to lower your overall borrowing costs – for example, interest rates on car loans are usually lower than rates on credit cards
You want to skip a payment – some lenders give you the option to skip a payment between your existing loan and your new one, which can be a nice boost for your budget
You want to pay off your loan faster so you can own your car free-and-clear (goodbye, car payments!)
You don’t like your lender – maybe you’re miffed at hidden fees, or poor customer service. Whatever the reason, you can refinance to find a new lender you like better
You are re-establishing your credit, if, for example, you had a previous bankruptcy. By paying off your old loan and starting a new one, your credit may improve because you’ll have two quality installment loans instead of one

Car refinancing may not make sense if:

Your vehicle is older than 10 years
You owe less than $7,500 or more than $100,000 on your loan
You drive for Lyft or Uber as your primary source of income, or otherwise use your car for commercial purposes
Your car has driven over 120,000 miles

In all those cases, it can be hard to find a lender who is willing to refinance your loan, or you may not be able to get a better loan than what you currently have. Ultimately, the only way to know if refinancing makes sense for you is to compare new loan offers with your existing loan and make sure you’ll be saving money.