When to Refinance a Car Loan

Updated: December 23, 2022
In this Article

    Many consumers think about when to refinance a car loan, but those who have never refinanced anything before come to the process at a serious disadvantage–at first.

    Once you learn a couple of things to do before fully committing on paper to refinancing your car loan, you’ll never worry again about whether you’re making the right decision.

    Auto Loan Basics When to Refinance a Car Loan

    Some might feel their intelligence being insulted with a car loan 101 section, but there are things some don’t know about this process that can help borrowers feel less intimidated going to the dealership or the lender. No matter whether you’re buying OR refinancing, you should know the following:

    An Auto Loan Is A Secured Loan

    The loan you apply for when buying or refinancing a vehicle will be secured by the vehicle. Like purchasing a home, the vehicle is collateral. This may seem like an unimportant-to-the-borrower detail, but it’s actually a VERY important detail. Why?

    Because all cars immediately lose value when they are purchased and driven off the dealer’s lot. From the start of your ownership of the vehicle, you are working against the clock in terms of how long the car, truck, van, etc. is resalable and for how much. Home loans work in the opposite direction–the house gains value over time.

    Cars usually do not. If down the line you need to sell the vehicle in order to pay off the auto loan, you might find yourself paying something out of pocket to offset the reduced current value of the car or truck.

    Auto Loans Feature Fees

    All loans will feature fees and closing costs, and your auto loan is no exception. Whether you buy or refinance, there may be a lender’s fee or origination fee associated with your purchase. There may also be other fees including delivery charges, etc. Some fees are non-negotiable, others may be negotiated and SHOULD be negotiated. This is true of purchase loans AND refinance loans.

    Auto Loans Are More Expensive At The Dealership

    As a general rule of thumb, you should shop aggressively for an auto loan and that is also true of the refinancing. Some don’t shop around and find out later they were badly taken for a higher rate or bigger closing costs, etc.

    If you do choose to refinance an auto loan, your best bet is to call some other lenders and tell them what your current rates and conditions are and let them try to give you a better deal. When you are done doing that, call your current lender and tell them what you got offered and try to get them to match or better the deal.

    Reasons To Refinance

    For most borrowers interested in refinancing an auto loan, the following reasons are the best:

    • Interest rates are falling or have fallen lower than your current loan
    • You can’t keep up with the current level of payments
    • You got your first loan from a lender that gave you an inflated interest rate

    Some borrowers who apply for financing at the dealership discover they have been given an inflated rate. Some consumer watchdog sources report this often happens when the applicant failed to check their own credit reports prior to applying for the loan to see what FICO scores are listed. Remember that your credit scores will definitely affect the interest rate you are offered at a lender or at the dealership.

    When To Refinance A Car Loan

    Here’s the rub when it comes to refinancing an auto loan – most times it may not be worth your time to bother doing. Why? To answer this, let’s review why people refinance any type of loan:

    • To get a lower monthly payment
    • To get a lower interest rate
    • To get out of an adjustable rate loan (where applicable)
    • To cash out on equity built up in the property securing the loan (where applicable)

    For car loans, there is no such thing as equity, but there ARE cash-out refinance loan options for auto loans. What this means for the borrower is that you’re taking out a larger loan–possibly larger than the vehicle itself is worth with the cash out tacked onto the transaction.

    Being upside down on your vehicle is a way of life the day you drive the car off the lot, but adding more debt to this type of loan isn’t a great idea if your goal is to get free of the monthly payment as soon as possible.

    Refinancing To Make Your Car Affordable Again

    The other reasons–get a lower payment, get a lower rate, or get out of an adjustable rate loan (also known as a variable rate loan) all make sense IF your goal is to make room in a monthly budget. Be advised that you do so at the expense of having to pay on the car longer.

    If your goal is to have more freedom in your monthly expenses, refinancing might be worth it. But if you don’t have a plan to somehow cut down on the length of time you are paying on the car loan (making extra payments, etc.) you may wish to consider that as a factor in your decision making.

    Refinancing And Overall Loan Cost

    If your goal is to save money for the entire loan transaction, refinancing isn’t a great idea because of the closing costs involved. Add to that the renewed loan term under the refinance will extend your payments well past the original payoff date for your original loan.

    For some borrowers, paying the extra money is NOT an option. They want the cheapest overall loan possible and in such cases the refinance option is not advised.

    Before You Commit To Refinancing A Car Loan

    There are three things you should do to be completely sure you want to refinance your car loan. The first is to review how many payments remain on your original loan and how much your total loan cost is from start to finish under the original agreement.

    Next, you should get some quotes on a refinance loan including all closing costs and other expenses. Explain that you want to get the total cost of the refinance from closing costs to payoff day. Compare those expenses with your current loan and ask yourself if paying the new closing costs is worth the money and whether refinancing in this context helps your bottom line.

    And before you commit to refinancing a car loan, remember that some loan agreements may contain a penalty for early payoff of the loan or special requirements for making a payoff payment. You should know what these are, where applicable, and how they affect your plans to refinance.

    Refinancing is like any other loan transaction–you want to prepare your credit in advance by making sure you have a record of on-time payments on all financial obligations in the last 12 months for best results. You should also make sure you know the contents of your credit report. Don’t apply for a new line of credit with outdated, erroneous, or otherwise inaccurate data in your credit report.

    Some borrowers will consider refinancing their current vehicle as an alternative to getting a new one. For others, this is not an option and trading in a vehicle instead is the preferred option. If you choose this route, be sure to familiarize yourself with the Federal Trade Commission’s warnings about trade-ins on certain vehicles and how some dealers take advantage of consumers in this area.


    About The AuthorJoe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News


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