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Refinancing your auto loan means replacing your existing loan with a new one, usually from a different lender. Your current loan gets paid off by the new lender and you start making monthly payments, hopefully smaller ones, on the new loan.
If you think your credit has improved since you bought your car, you should look into . There’s a good chance you can lower your interest rate and end up with a smaller monthly payment. You might also be able to shave some time off the loan, or go the other way and extend the term of the loan if you’re having trouble making your monthly payment.
What’s the catch? There isn't much of one: It takes some time, and your credit profile might take a slight hit when you apply for the new loan. However, know two important things:
The prospect of paying less interest or lowering your monthly payments are the main reasons to consider refinancing. Let’s say your current auto loan has a 10% interest rate, and you’ve been making payments for a year or so. Chances are, your credit has improved and you could now qualify for a lower interest rate, which could lower your monthly payments. If you simply go to your current lender and ask it to lower your rate, it will likely say no. After all, you signed a contract at a certain interest rate and the lender wants its money.
Lucky for you, in today’s competitive market, plenty of other lenders are eager to get your business. When you refinance, you can simply with another bank, credit union or online lender. The new lender pays off what you owe on your existing loan, called the balance, and creates a new loan. You then start sending your monthly payments to the new lender.
If you meet the requirements, refinancing your car loan for a smaller payment could allow you to put more into savings, investing or a home improvement project. Or you may be able to pay off your car sooner. All of these options are better than pouring your money down the drain by paying more interest than you need to on a car loan.
Refinancing your auto loan could be the right move for reasons other than your improved credit. Even if you’re satisfied with your current loan, it doesn’t hurt to see if you can save money on interest. It makes sense if:
Interest rates have dropped. Interest rates fall for a variety of reasons: a changing economic climate, increased competition in the banking industry, even regulatory changes. If interest rates are lower now than when you first got your car loan, refinancing is likely to lower your rate and could help you pay the loan off sooner. Or, it could save you money on interest. It only takes a few minutes to apply for refinancing and see if a new lender — a bank, credit union or online lender — will offer you a lower interest rate.
A car dealer marked up your interest rate. When you got your existing loan, the car dealer might have charged you a higher interest rate than you could have qualified for somewhere else. This often happens to shoppers who don’t before buying a car. They are persuaded to take the dealership’s loan because they didn’t shop around for the best interest rates. But you can undo the damage by refinancing and getting a new loan at a lower interest rate.
You can’t keep up with payments. Maybe you got overexcited at the dealership and bought a car that’s really too expensive for you. You might be struggling to keep up with payments. Or maybe you’re facing unexpected financial challenges because of a job change or other circumstances. By refinancing your car loan, you can take more time to pay it off, and this will lower your payments. You should think carefully before taking this course of action: If you extend the loan term, you’ll pay more in interest over the life of the loan. That’s not optimal — but it’s better than damaging your credit by missing payments.
Timing does play a role in . Most lenders won't refinance your original auto loan until it has been open for at least two to three months, allowing time for the title of your car to transfer from the manufacturer or previous owner to your current lender. Also, you may not benefit financially if you have only a few years remaining to pay off your original loan.
If it looks like refinancing could make sense for your situation, you can run the numbers on an and your car before applying.