If your car payment feels a little tight or your interest rate seems high, refinancing your auto loan could help. Many drivers refinance to secure a lower interest rate, reduce their monthly payment, or pay off their loan faster. Some also refinance to remove a co-signer.
If you’ve been asking, “When should I refinance my car?” it depends on your financial goals. Refinancing offers several benefits, but it isn’t right for every situation. Here’s how auto loan refinancing works and whether it makes sense for you.
Auto Loan Refinancing Explained
An auto loan refinance is when you replace your current auto loan with a new one. The new loan can come from the same lender or a different one. When you refinance, your lender pays off your existing loan balance, and you begin making payments on the new loan.
When you refinance, both the interest rate and term can change. It can affect your monthly payments and the total cost of the loan. Lengthening your term can lower your monthly payments, but it may increase the total interest you pay.
On the other hand, shortening your loan term allows you to pay off your loan faster to save on interest, but it increases your monthly payments.
How Does Car Loan Refinancing Work?
The process of refinancing an auto loan is similar to applying for your original loan. Depending on the lender, it may take several business days, though some lenders offer same-day approvals. Here’s how it typically works:
1. Review your current loan
Pull up your loan statement and review the details. Check the interest rate, remaining balance, monthly payment, and whether your loan has any prepayment penalties.
2. Check your credit
If your credit score has improved since you took out the original loan, it may help you qualify for better rates and terms.
3. Compare lenders
Not all lenders offer the same rates and terms. Shopping around can help you find the best deal. Credit unions, in particular, often offer lower rates and fewer fees because they are nonprofit organizations focused on serving their members’ needs.
4. Gather your documents
Gathering your financial information before you apply may help prevent delays. Lenders typically ask for:
- Photo ID
- Vehicle make, model, year, and mileage
- Vehicle identification number (VIN)
- Current loan information
- Employment and income information
5. Submit your application
Many lenders allow you to apply for auto loan refinancing in person or online. If you apply online, you may have to scan and upload your documents.
6. Review and accept the offer
If approved, the lender will provide the terms of your new loan. Make sure you understand the details, including the interest rate, monthly payment, loan term, and fees, before signing.
7. Start making payments on your new loan
The lender will pay off your original auto loan, and you’ll start making payments on the new loan.
When Should You Refinance Your Car Loan?
If you’re wondering, “Should I refinance my auto loan?” it could be a smart financial move if your circumstances or goals have changed. Here are a few situations where it may be worth considering:
Interest rates have dropped
Many people refinance to lock in a lower interest rate, and the savings can be substantial. Depending on your new rate, loan balance, and term, even a one to two-point drop could save you hundreds or even thousands of dollars in interest over the life of the loan.
Your credit score has improved
Your credit score is an important factor that determines the interest rate you receive. Borrowers with lower scores typically receive higher rates because of the increased risk of late payments or default. If your score has improved, you may qualify for a better rate, which could lower your borrowing costs.
You want a lower monthly payment
If your car payment is straining your finances, refinancing can give you some breathing room. Extending your loan term spreads your balance over more months, which can lower your monthly payment. However, this will increase the total interest you’ll pay over time.
You want to pay off your loan faster
Refinancing with a shorter loan term gives you predictable monthly payments while also allowing you to pay off your loan faster. The shorter your loan term, the less you will pay in interest.
When Refinancing May Not Make Sense
Refinancing doesn’t always help you save money. The costs could outweigh the benefits. Here are some situations where keeping your original loan may be better:
Fees outweigh potential savings
Some lenders charge origination fees on the new loan, and you may also face a title transfer fee to move the title to the new lender. Your original loan may also have prepayment penalties for paying off the balance early.
Your loan balance is already very low
With most auto loans, the interest is front-loaded. That means more of your payments go toward interest than paying down the principal. By the time you’re near the end of your loan, the majority of the interest has already been paid, and refinancing may not result in much savings.
Extending the loan significantly increases the total interest
Extending your loan may lower your monthly payments, which can be helpful when money is tight. However, taking longer to pay down your loan increases the total interest you’ll pay, which could erase any potential savings from a lower rate.
Your vehicle doesn’t qualify due to age or mileage
Not all vehicles qualify for auto loan refinancing. Older or high-mileage vehicles may be declined due to their reduced resale value. Since the vehicle itself serves as collateral for the loan, your lender will want to ensure they can recover the loan amount if you default.
What to Consider Before Refinancing an Auto Loan
Before you refinance, look at the full financial picture to make sure it supports your goals. Here are some things to consider:
Interest rate vs. loan term
Refinancing to get a lower rate could reduce your monthly payment, but if you extend your loan term, you may end up paying more interest over time. On the other hand, a shorter loan term may raise your monthly payment, but it can help you pay off your loan faster and save on interest.
How refinancing could affect your credit
Your credit will be checked when you apply for new financing. A hard credit check will temporarily lower your credit score for a few months. This could affect the rates or terms you’re offered on other loans.
Prepayment penalties
Before refinancing, check whether your current auto loan includes prepayment penalties. Some lenders charge a fee if you pay off your loan early, which could reduce or even eliminate the savings from refinancing.
How Auto Loan Refinancing Can Help Your Finances
Refinancing your auto loan can improve your financial situation in several ways. Lowering your monthly payment can give you more flexibility in your budget, making it easier to cover expenses, build an emergency fund, or pay down other debt.
A lower interest rate or a shorter loan term can also lower the total cost of borrowing. Reducing your interest rate by just one or two points could help you keep more of your hard-earned money instead of it going toward interest charges.
Refinancing can also help you realign your loan with where you are financially right now. Maybe your credit score has improved, or your income or expenses have changed. Restructuring your loan can help you adjust your payments and terms to better fit your budget.
How GLCU Can Help with Auto Loan Refinancing
If you’re thinking about refinancing your auto loan, our loan experts can help you see whether it makes sense for your situation. Just bring us your current loan, and we’ll crunch the numbers.
At Great Lakes Credit Union, our nonprofit status lets us offer more competitive rates to our members*. You may also qualify for a 0.25% APR¹ discount², which helps you save even more. Plus, the ability to skip up to two payments per year can give you a little extra breathing room in your budget when you need it.
Members also have access to exclusive discounts on both auto and homeowners insurance³ for extra savings. You can even set up automated bill payments to avoid late fees.
Ready to take the next step? Explore our auto loan refinancing options today and see how much you could save.
*APR=Annual Percentage Rate. Actual rate based on credit history, income, vehicle model year, mileage and other factors. Rates are subject to change at any time. Loan subject to credit approval.
¹Rates include discount of 0.25% APR* when you set up an automatic payment to pay your loan each month.
²Payment example: 63-month new auto loan of $20,000 with an APR of 7.24% will result in a monthly payment of $382.57.
³Click here to submit or verify what insurance you’ll need for your new auto loan from GLCU. Members with vehicle loans (Auto, Boat, RV, Truck), please contact your insurance agent to update your vehicle’s insurance policy with our lienholder address: Great Lakes Credit Union, P.O. Box 2238, Sioux City, IA 51104. Note: We do not currently offer ATV, dirt bikes, side-by-sides (SxS), or jet ski financing.
The information in this post is for educational and informational purposes only and does not constitute investment or financial advice. You should consult a licensed financial advisor before investing in any financial product or service.
