When It Makes Sense to Refinance a Car Loan

There are many reasons why someone would want to refinance a car loan, but in most cases, it's done in order to save money. This is usually done by securing a better interest rate or changing the loan term. However, saving money can mean different things to different people, so it's important to consider all aspects of both your current loan and any potential refinanced loan before committing to it.

Refinancing a Car Loan: What Does It Mean?

When you refinance a car loan, it means that you are replacing your current loan with a new one with different terms, usually from a new lender. Basically, you swap lenders in order to get terms that are more favorable for you and your current situation.

There are several reasons why a person may want to refinance their auto loan, but the most common ones are to secure a lower interest rate or to change the loan term in order to save money. A lower APR can lower the monthly payment and reduce the cost of interest long-term, which can save a borrower hundreds (or even thousands) over the life of a loan.

There is no minimum waiting period to refinance a car loan after buying a car. And the younger the current loan is, the more money refinancing can usually save a borrower. However, before refinancing, you would be wise to make sure that you understand your motivations for doing so and that it can accomplish the outcome you are looking for.

Times Where It Makes Sense to Refinance a Car Loan

Refinancing can have different outcomes for different borrowers, so it is important to understand why you want to refinance. Here are a few scenarios where it would (generally) make sense:

  • If Your Credit Score Has Improved
    The APR that you qualify for is largely dependent on your credit score. If you have been keeping up with all of your bills and making all of your car loan payments on time for a year or two, it's possible that your score has improved since taking out the loan. Or, perhaps some negative items have dropped off of your credit reports. If your credit score has improved, then you might qualify for a better interest rate. Refinancing the loan with a better APR, even if it is an improvement of just a percentage point or two, can help you save money over the remainder of the loan term.
  • If Interest Rates Have Dropped Since You've Taken Out Your Loan
    The Federal Reserve, or the Fed, controls the overall market interest rate. If interest rates have declined since you took out your initial car loan, it is possible that you can qualify for better terms even if nothing else about your borrower profile has changed. Currently, interest rates are at historically low levels, but the Fed raised them once at the end of 2015 and has plans to do so again in 2016.
  • If Your Financial Situation Has Changed
    Borrowers who have seen positive change in their financial situation, such as those who have gotten a raise or a higher-paying job, may want to refinance in light of this. Generally, these types of borrowers will want to shorten the loan term in order to pay it off faster. Conversely, some borrowers may find themselves at the mercy of a negative financial change. If these people are in extreme danger of missing payments or defaulting on the loan, they may try to refinance with the goal of extending the loan term to lower their monthly payment. This will help them free up money in their budget in the short-term, but results in them paying more in the long run.

Generally speaking, refinancing can be an excellent money-saving strategy when a borrower stands to receive a lower APR or shorten the term with a lower APR. This will not only allow them to pay off the loan faster, but also reduce the amount of interest charges they end up paying.

However, those borrowers that simply want to free up money in their budgets by extending the loan term will find that they will most likely end up paying more for the car in total than they would have without extending it. Unless the situation is dire, we wouldn't recommend this course of action.



Can Borrowers with Bad Credit Refinance?

At Auto Credit Express, we have been helping people with damaged credit find financing for close to 20 years. Our customers tend to ask questions about refinancing because they want to know if it can save them money.

What we tell them is this: refinancing options are typically only available to those with good credit scores, so it can be done if the borrower is far enough along in the process of re-establishing their credit. If you have kept current on your loan and all of your other obligations for around 18 to 36 months, it's entirely possible that you may qualify for better terms if you refinance.

However, not all credit-challenged consumers will be able to refinance, as the circumstances have to be just right in the majority of cases. For example, you have to have equity in the vehicle and you have to be current with your payments if you want to refinance a bad credit auto loan. Qualifying for refinancing can be tough until you have taken the necessary time to rebuild your credit and improve your score.

Financing First

Sometimes, borrowers may find that it more beneficial to trade in their current car in order to open themselves up to more potential financial options, rather than refinancing. Or, they might have less than perfect credit and are seeking to get approved for a loan in the first place. Either way, Auto Credit Express can help them on their mission to get approved for an auto loan with less than perfect credit.

We have the connections that can help you get the vehicle that you need, and the service we provide is completely free of charge. To get started, all you need to do is complete our fast and easy online application, and then we'll get to work for you.

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Deciding Whether or Not to Refinance Your Car

If you want a better interest rate on your auto loan and possibly a lower monthly payment, you may be able to refinance your car. Just make sure that the timing is right. It could pay to refinance if your credit score has improved since you took out the original loan. You will also want to consider whether or not interest rates in general are lower.


How to Refinance Your Car

Refinancing a loan is typically very straightforward, so approval decisions are usually made quickly. After you are approved for refinancing, the process is fairly simple.

  • Call your current lender and request a 10-day payoff amount for your loan.
  • Receive a check for the payoff amount from your new lender.
  • Use this check to pay off the old loan.
  • Start making payments to your new lender.

Before signing on with a new lender, you should shop around for the best rates and terms. Luckily, there are plenty of online resources available that can help you with your search.

When Refinancing Makes Sense

Again, with refinancing, it's all about timing. For example, because of the way that most auto loans are structured, a larger portion of the interest is paid during the first half of the loan term. So, it will benefit you more to refinance earlier instead of later in the repayment period.

You should also ask yourself a few questions.

Has Your Credit Score Improved?

If you had damaged credit when you financed your vehicle, it is likely that you were assigned a higher-than-average interest rate. However, if your credit is now significantly better, you may be able to get a lower rate through refinancing. A new lender might be happy to approve you if you have made several months of on-time payments on your current loan.

Has the Prime Interest Rate Dropped?

All interest rates are based on the prime rate, which is largely determined by the federal funds rate. This is the overnight rate that banks use to lend to one another, and it can fluctuate. If the prime rate has dropped even a little since you bought your car, you could save money by refinancing your loan.


Would You Benefit from a Lower Monthly Payment?

If you are struggling with an expensive car payment, refinancing could bring these payments down to a more comfortable level. This can happen two ways. If your interest rate drops enough, you might pay less monthly without extending the length of your loan. However, some consumers choose to refinance without the benefit of a reduced interest rate.

If you are only concerned with lowering your car payment, you can refinance with a longer term auto loan. And while this will most likely allow you to pay less from month to month, you will probably end up paying more in interest charges over the course of the loan. So, make sure that this is really the best option for you before extending your loan term just to get a lower car payment.

Refinancing can be good if you want to refinance your car for the right reasons and if the timing is right. If you take a good look at your current situation and realize that the circumstances are not really ideal, it might pay to wait on refinancing.

When Buying a Car Makes Sense

If your current car isn't as safe and reliable, it may be time to replace it with a newer model. But if you have bad credit, you may be putting off your purchase until your credit is better. However, at Auto Credit Express, we don’t think that you should have to risk your safety. You can get the car you need now, and we can help.

For no charge, we will match you with a dealership in your area that can give you your best shot at getting approved for an auto loan. Our process is quick and hassle-free, and applying with us will put you under no obligation to purchase anything.

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