Should I Refinance My Car Loan?

Your original loan is from an auto dealer

• Scenario: Dealers often do business with several banks and lending companies. But they’re not usually seeking the best deal for you. Instead, they may steer you towards a loan that gives them a bigger profit. In fact, some lenders pay dealers a commission. What’s more, some allow the dealer to mark up the lender’s interest rate by several percentage points and pocket the difference.
• Refinancing Result: One study by the nonprofit Center for Responsible Lending found that the average loan rate mark-up was 2.5 percentage points. So, simply refinancing the loan back to a fair market rate can save you hundreds of dollars in interest charges over the course of the loan. 

Overall interest rates have dropped

• Scenario: You financed your vehicle through an honest dealer or a bank with a great reputation. When you took out the loan, you were certain you were getting a fair deal. But in the years since then, national lending rates have fallen considerably.
• Refinancing Result: On average, Americans pay about $32,000 per vehicle. On a 60-month loan, if you can refinance to an interest rate that’s 2 percentage points lower, you can save about $30 a month. That adds up to a tidy $1,800 over the life of the loan!

You need to increase your cash flow

• Scenario: When you bought your vehicle, you chose a loan with a short repayment period, perhaps three years. Since then, your finances have changed. You lost your job. Or had a baby. Or bought a house. In any case, that high monthly car payment is putting a big hole in your budget and stress on you.
• Refinancing Result: To reduce your monthly payments, you can extend the length of the loan. Let’s say you’re paying off a $25,000 loan at 3.5% interest. On a 36-month loan, your monthly payment would be roughly $730. If you refinance to 60 months, your monthly cost would drop to $455. 

Your credit score has improved considerably

• Scenario: When you bought your car, you were struggling financially. Maybe you had just graduated from college. Or you had a low-paying job. Or had run up some debt. That means any loan you got probably came with a high interest rate. But now things have changed. You’ve got a good-paying job and have wiped out a lot of your debt. Now, your credit score might help you refinance your car or truck.
• Refinancing Result: Credit scores are three-digit numbers that summarize your financial history. They play a large role in determining whether you qualify for loans and the rates you get. A higher score means you’re considered a better credit risk. If your financial turnaround has pushed your score above 700, you probably can qualify for a quite favorable refinancing rate. 

Your car is not aging as well as your loan is

• Scenario: The vehicle you purchased is not as great as you thought it was, and it’s starting to break down. Or your car is fine, but you’ve put a lot of miles on it due to your job commute or vacation travel. In any case, you doubt the vehicle will last until your current loan is paid off.
• Refinancing Result: In this case, it makes sense to refinance to a shorter loan period. Yes, that will increase the monthly payments in the short term. But there will be long-term savings. First, you’ll pay less in interest charges with a shorter-term loan. Second, you won’t have to make two sets of car payments when you buy your next vehicle. And third, you might get a better interest rate when you finance your next car or truck if you’re not carrying as much debt.