Things to Consider Before Refinancing Auto Loans

While there’s no minimum waiting period to refinance an auto loan after buying a car, the earlier you refinance, the greater potential you have to save. That’s because most of the interest is paid off during the first half of the loan

When you refinance, consider all aspects of both your current auto loan and the potential refinanced loan — including the interest rate, payments, early repayment penalties and length of the loan

Motivations for Refinancing

Before you consult lenders, determine what your primary objective is for refinancing your car loan. If you’re able to make your current monthly payments, consider refinancing to a lower rate but keep your payments the same so you can pay off your loan faster (and with less interest).

Alternatively, if you need some breathing room in your budget, consider asking to extend the term of your car loan to lower your monthly payments. The downside of that is you’ll ultimately pay more interest.

Changes to Your Borrower Profile

When you apply for an auto loan, one of the most important factors is your applicable credit scores. You may qualify for a better interest rate if your credit scores have increased since you took out a car loan or if interest rates in general have declined since taking out the initial car loan.

However, higher overall market interest rates can also affect refinancing. For example, the Federal Reserve may decide to increase average interest rates market-wide. As a result, lenders will charge you a higher rate when you refinance due to external factors, even if your borrower profile hasn’t changed.

Your Car’s Value

If you owe more on your car than it’s worth, you might have a hard time finding a lender willing to refinance your loan, especially at a lower interest rate. Owing more money on your loan than the car is worth is referred to as being “underwater.”

Underwater cars are riskier for lenders to refinance because if the lender had to resort to seizing your car and selling it, it wouldn’t get the full amount owed. Making an additional payment on your existing loan to keep it from going underwater could allow you to secure a lower interest rate on your refinancing.

Early Repayment Penalties

Check the terms of your existing car loan before you decide to refinance; there may be early repayment penalties. This doesn’t always mean refinancing isn’t possible, but you need to account for the extra cost.

For example, if you owe $10,500 on your car loan but it has a $500 early termination penalty, calculate your refinanced payments as if you’re borrowing $11,000 to get a better idea of how much (if anything) you’ll actually save.