A car loan refinance1 can get you a lower interest rate on your existing auto loan and even reduce your monthly payments. If you qualify for refinancing, it can help you save money and get out of debt faster — but only under the right circumstances.
The fine print is that refinancing can come with hidden costs and limitations. That means it may not necessarily be the smartest move for your financial situation. Deciding whether or not to refinance is all about weighing the advantages against the potential drawbacks. With that in mind, here are some of the pros and cons of refinancing a car loan, and how to decide if it’s right for you.
The pros of refinancing a car
Auto loan refinancing comes with a long list of benefits. Here are some of the major ones to consider.
You can potentially lower your interest rate
When you refinance, you essentially exchange your existing loan for a new loan. This new loan comes with new terms and a new interest rate. So, if you’re in a better financial position now than when you were originally approved for your loan, you might qualify for lower loan rates.
Here are some markers that could indicate you’re in a better financial position:
Your credit score has improved.
You got a raise.
You got a new, higher-paying job.
You took on a side gig to improve your cash flow.
You paid off other debts.
If any of these are true, you may qualify for a lower interest rate and, therefore, a lower car payment. Even just a small decrease in your rate could save you a significant sum in interest over the life of the loan.
You can get better terms if you were taken advantage of
When you buy a new car (or a used car) through a dealership, all the financing is ultimately handled by credit unions, financial institutions, and certain car manufacturers. However, the process is completed through the dealer. And the dealer won’t always quote you a lender’s best rates.
Instead, they’ll sometimes quote you a higher rate and take the difference as profit. If you think you got a bad deal, refinancing could help you repair the damage. If you’re not sure, shop around and get prequalified with a few refinance lenders. What kind of rates could you get? If they’re significantly lower than what your dealer gave you, a refinance may be worth considering.
You can pay off your debt faster
When you refinance your car, you’ll have the ability to select a new loan term. Selecting a shorter term is a great way to save money on interest and get out of debt sooner.
Here’s an example to illustrate:
Let’s say you owe $10,000 on your car with three years remaining on your loan term. Your annual percentage rate (APR) is 8.5%. If you refinance this loan at the same interest rate — but select a two-year term — your monthly payment will go up from $316.38 to $454.56. However, you’ll get out of debt a whole year sooner. And you’ll save a whopping $454.95 on total interest just by switching to a shorter loan term.
If you want to see how these numbers shake out for your car loan, you can use a refinance loan calculator.
You could lower your monthly payments
If your monthly payments are so high that you’re struggling to make them, it might be worth refinancing to a longer loan term. If you miss a payment, that can have serious financial consequences. Even just one missed payment could lower your credit score and make it difficult to open new lines of credit in the future.
Refinancing to a longer term spreads your loan repayment out over more months. Usually, that leaves you with a lower bill month to month. That can make it easier to pay your bills and free up room in your monthly budget for other things.
There is one big downside to this. Though you’ll have lower monthly payments, you’ll be making more of them, which means you’ll end up paying more in interest over the life of your loan. You’ll have to consider whether or not it’s worth trading a higher overall loan balance for a lower monthly payment.
You can access the equity in your car
If you need cash for a short-term emergency, a “cash-out refinance” can help put extra money in your hands fast.
Also called “cash-back auto loan refinancing,” a cash-out refinance works similarly to a regular refinance. You simply trade your old loan for a new loan, hopefully with a better interest rate and better terms. The difference is that, with a cash-out refinance, you can also trade in any built-up equity in your car for cash.
Since you’re getting cash in exchange for the equity, this amount will get added to your outstanding loan amount. You’ll need to make consistent monthly payments on this new, higher balance, which means you’ll likely pay more in interest over the life of the loan.
The cons of refinancing a car
Auto loan refinancing isn’t for everyone. Here are some potential disadvantages to keep in mind.
It may be hard to qualify
Some lenders have restrictions on who is eligible to refinance. For example, you may be required to have a certain balance left on your current loan to qualify for a new loan. Additionally, some lenders won’t refinance cars that are ten years or older. Others have maximum mileage limits.
If you don’t meet your new lender’s requirements, talk to your current lender about a refinance, or consider alternatives like taking out a personal loan.
Your rate might not improve
A car refinance is only beneficial if it can save you a significant amount over the life of the loan. If your credit hasn’t improved much since you took out your current auto loan, you’re unlikely to qualify for sufficiently lower rates. (In some cases, you could even end up with a higher interest rate than you started with.)
If you can, try to improve your credit score before you apply for a refinance. To do this, you can:
Open new lines of credit or ask for higher limits on existing lines of credit.
Use no more than 30% of your limit on any credit card (this is called credit utilization and is a key factor in determining creditworthiness).
Pay your bills on time.
Take on a side gig to improve your cash flow.
Check your credit report and dispute any errors.
Ask your creditor to remove any late payments or settled collection accounts from your record.
Sign up for a service like Experian Boost, which will give you credit for on-time rent and utility payments.
Your loan could become upside down
If the value of your car falls below the outstanding balance on your loan, this is called being upside down. Ideally, if you were to sell your car, you’d use the money from the sale of the vehicle to pay off the car loan. When you’re upside down, however, the amount you receive from the sale can’t cover the loan amount, which means you may have to take on additional debt or dip into savings in order to pay the balance. This can negatively affect both your credit score and your ability to borrow more.
You’ll have to pay fees
Taking out a loan — whether it’s a new loan or a refinance — typically involves paying fees to the lender. These can include application fees, origination fees, or title transfer fees. Unless you have a long loan term, the savings you gain from a reduced interest rate may not be enough to offset the fees you’ll pay to refinance. You may also have to pay prepayment penalties on your current loan, which can eat into your savings, too.
Can you refinance your loan more than once?
Technically, there’s no limit to how many times you can refinance your car loan. Refinancing can impact your credit history, but usually in a net-positive way. When you do a traditional auto refinance, you’ll only incur a small credit penalty — usually no more than a few points at a time. And if refinancing more than once helps you get out of debt faster, it may ultimately boost your credit score in the long run.
There is an exception to this rule. If you undergo multiple cash-back refinances, you’ll repeatedly increase your total debt. This will have a bigger negative effect on your credit score and could make it harder to apply for new lines of credit in the future.
Keep in mind that you’ll also be paying fees and/or penalties for each new refinance loan. These charges can add up and eat into your savings.
How soon can I refinance my car loan?
To complete a car loan refinance, you’ll need proof of transfer of the vehicle title. A title typically takes two to three months after you bought the car to transfer to your name. So, if you bought your car within the last two to three months, it may be too early. In this case, you should wait until you receive the title before applying to refinance.
On top of this, some lenders may require you to have had your current loan for six months or longer before you apply.
Should I refinance my car?
Consider refinancing your car if:
Your financial situation has improved since you took out the original loan, and
You know you can get a much better interest rate.
You want to lower monthly payments by extending your loan term.
Refinancing may not be a good idea if:
The value of your car has dropped significantly since you bought it,
Your car is more than ten years old and has over 125,000 miles on it, or
You have a bad credit score.
Compare auto loans with Navient Marketplace
Are you considering an auto loan refinance? Whether your goal is lower monthly loan payments or a lower interest rate, Navient Marketplace can help you find what you’re looking for. Just fill out a few details about you, and in less than a minute, you’ll be automatically matched with offers from top auto loan providers. Then compare, contrast, and choose the best offer for you. Ready to get started on Navient Marketplace2? It’s fast and free, and it won’t affect your credit score.