Should I Refinance My Car? A 9-Question Checklist

Refinancing your car can make sense if you’ll save money or lower your monthly payment. Here’s what you need to know if you’re thinking about refinancing.

Updated: September 20, 2023

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A car loan refinance can sometimes feel like a get-out-of-jail-free card. Under the right circumstances, it can help you land lower interest rates and even a lower monthly payment1. If you got stuck with a high interest rate on your original loan — or if you have a better credit score now — a refinance could help you save hundreds of dollars. 

However, it’s not the right solution for every borrower. So, if you’ve been wondering, “Should I refinance my car?” be sure to consider these nine questions first.

Key takeaways

  • If market interest rates drop or if you improve your financial situation, it could be a good time to consider auto loan refinancing.

  • A car loan refinance can help you save money over the life of your loan. It can also lower your monthly payment. 

  • Refinancing isn’t right for everyone. When you refinance, you may have to pay fees or penalties, which could cut into or negate your savings. 

  • Lenders will consider your personal finances and the condition of your car to determine your eligibility for a refinance.

1. Has my credit improved?

If your credit score has improved since you first took out your auto loan, you may qualify for a better interest rate. Lenders consider your credit score an indicator of how likely you are to repay your debts. If you have a good credit score, that shows you have a history of making timely loan payments and managing your finances responsibly. That makes you a lower-risk borrower. As a result, new lenders are more likely to offer you lower interest rates. 

You’ll qualify for great refinance rates if you have a credit score of 700 or above. Of course, your credit score isn't the only thing lenders consider when determining your interest rate. Other factors like your income, employment status, loan term, and national interest rate trends can all impact your loan offer.

2. Are national interest rates down?

A great time to refinance a car loan is when national interest rates are down. That’s because lenders select their rates based on national trends. This is true of both new car loans and auto refinance loans. 

If market rates were high when you took out your loan but are low now, refinancing could help you take advantage of the change and secure a lower rate for yourself. On the flip side, if market rates have risen since you took out your loan, refinancing now could result in an even higher interest rate. 

So, how can you tell if interest rates are up or down? Auto loan rates typically fluctuate based on the “federal funds rate” which is a national standard interest rate set by the Federal Reserve. It’s used to determine everything from credit card rates to student loan interest. 

To figure out how the rates on your existing loan compare to current offers, look up the current prime rate. This is a benchmark minimum interest rate based on the federal funds rate. If the prime rate is significantly lower than the interest rate on your current loan, it may be time to refinance. 

3. Can I afford to pay off my debt faster?

If you can afford the monthly payment on your current auto loan — or have room in your budget to pay even more — a refinance could help you get out of debt faster. You can accomplish this in two ways.  

Reducing your loan term

When you refinance, you can ask that the term of your loan be reduced. Because your loan payments will be spread out over fewer years, reducing your term will lead to a higher monthly payment. However, you’ll be making fewer total payments — which means you’ll pay less interest over the life of the loan. Reducing your term will also help you get out of debt faster.

Getting a lower interest rate

If you can afford your current monthly payment but can’t afford to go any higher, refinancing could still help you. For example, if you secure a low refinance rate but keep your monthly repayment amount the same, a higher percentage of each payment will be going toward the loan principal. That will help you pay it off faster without increasing your monthly bill. 

4. Did I finance my car through the dealership?

If you got your current loan through a car dealership, refinancing may be a good idea. This is because dealerships often give borrowers higher interest rates than financial institutions like banks or credit unions do. Further, dealerships often add extras to loan contracts. These can include:

By refinancing your loan, you can eliminate any unnecessary add-ons. This can help reduce your monthly payments and save you money. 

5. Are my monthly payments too high?

If you’re struggling to make your monthly car payments, refinancing could help reduce your bill. If you can secure a better interest rate on your new loan, that alone may result in a lower minimum due each month. 

If you want an even lower payment, consider applying for a longer term when you refinance. This will allow you to pay off your loan in smaller installments over a longer period of time. Keep in mind that, though this may result in a lower monthly payment, it could also mean that you pay more in interest over the life of the loan. 

6. When did I buy the car?

Lenders usually require borrowers to meet certain eligibility requirements before they’ll grant an auto loan refinance. Many lenders require you to have held your current loan for a certain amount of time. For many lenders, this minimum is six months. So, if you bought your new car just a few weeks ago, you may not yet be eligible for a refinance. 

Other lenders consider the age of your car, not just how long you’ve had it. If your car is more than ten years old or has more than 100,000 miles on it, you may not qualify for a refinance with certain lenders. 

7. Do I qualify?

Even if you decide you want to refinance, you’ll still need a good to excellent credit score to qualify. When you apply, the lender will conduct a “hard inquiry” on your credit, which involves pulling your credit report and payment history and making sure you can afford the loan amount. If you have a regular income, don’t have much other debt, and haven’t missed any recent payments, you likely have a healthy credit history.

Next, the lender will consider the condition and value of your car. If the value of your car has dropped significantly since the time you purchased it, you’ll have a harder time refinancing your auto loan. If your insurance company has declared your car totaled in the past, you may be ineligible for refinancing. 

8. Is my loan in danger of going upside down?

An upside-down car loan is a situation where you owe more on your auto loan than the car is worth. It's also known as having “negative equity” in your car, or being “underwater” on the loan. 

For example, if you owe $15,000 on a car that is currently worth only $10,000, you would have negative equity of $5,000. In this case, even if you were to sell the car at its full current value, you would still owe the lender the remaining balance of $5,000.

If you’re upside down on the loan, or in danger of going upside down, you’ll have a hard time finding a lender to refinance with. And even if you do, it may not be worth it –– the refinancing loan is likely to come with a much higher interest rate.  

9. Can I afford the fees?

While auto loan refinancing can offer significant savings in certain situations, it’s important to remember that it isn’t free. Every time you apply for a new loan — including a refinance loan — you’ll have to pay loan application fees, origination fees, and title transfer fees. Some lenders also apply additional charges. In some cases, the savings you make from getting a lower interest rate may not be enough to offset the costs. This is particularly true if your current lender charges prepayment penalties

Before you finalize a refinance, be sure to read the disclosures on your new loan and tally up your new lender’s fees. Then, use a refinance loan calculator to calculate your potential savings. Make sure they’re significantly more than the sum of the fees before you move forward. 

Compare auto loans with Navient Marketplace

If you’re ready to exchange your old loan for a new one, refinancing could be right for you. An auto loan refinance can help you secure lower monthly payments and a lower interest rate. Both can help you save money.

The first step is to shop around and see what kinds of refinance rates are out there. For that, there’s no better tool than Navient Marketplace. Just fill out some basic personal information, and you’ll be automatically matched with offers from some of the top auto loan providers. You can then compare, contrast, and choose the best offer. 

Fill out a profile on Navient Marketplace today. It’s fast and free, and it won’t affect your credit score.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

Navient customers are invited to consider auto loan refinance offers through our partner Fiona. Navient has not shared your information with Fiona. Auto loan refinance offers are made by participants in Fiona’s lending platform, powered by Engine by MoneyLion. Engine by MoneyLion is the technology platform powering financial services online. Checking your rate will not affect your credit score.

1 Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.

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