Auto Loan Refinancing Dos and Don'ts

Car loan refinancing document


Deciding when you should — and when you shouldn't — refinance your auto loan

Not sure if you should refinance your auto loan?  In this section, we weigh the pros and cons to help you decide.
 

When it Makes Sense to Refinance your Auto Loan

 

If your credit score improves

If you obtained a car loan with a higher interest rate because your credit score was lower, and you've since improved that credit score, it may be time to refinance even with a minimal credit score improvement of 50 points. 
 

If auto loan interest rates improve

If interest rates for auto loans have dropped since the time you obtained your original loan, it's probably a good idea to refinance if you qualify.  An interest rate improvement of even one point can noticeably decrease your monthly car payments as well as the total amount of the loan you'll ultimately pay.      
 

If you need to lower your monthly payments to keep your car

If you're struggling to afford your monthly car payments, or you're at risk of losing your car because you can't make your monthly car payments, it makes sense to refinance for a longer loan term.  Keep in mind this strategy is wise for people who currently need help and not for people looking to save money over the long haul, since it actually increases the amount of money you'll owe over time.  
 

When it Doesn't Make Sense to Refinance your Auto Loan

If you're looking to save money over time 

As we stated above, if you're looking to save money over time, it's probably not a good idea to refinance your auto loan for a longer term.  For example, turning a three year loan into a five year loan increases the total amount of money you'll be required to pay back.
 

At, or near, the end of your loan term

The best time to refinance an auto loan is near the beginning of the loan term and not the end, since certain lenders limit refinancing options on older cars due to their decreased value.  What's more, you pay the most in interest at the beginning of the loan, so it's best to refinance near the beginning of the term versus the end.     
 

If there are prepayment penalties on your existing loan

Be sure to check the terms of your existing auto loan to see if there are any prepayment penalties that make refinancing more expensive option than it's worth.  Not only could your existing lender require you to pay a portion of the remaining interest (not just the principal balance), you might be on the hook for the principal balance plus the total interest amount.  Expensive prepayment penalties such as these make it unwise to refinance.
 

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