If you’re running low on money or see a better interest rate advertised, refinancing a car loan can seem appealing. It’s one way to potentially reduce your interest rate and monthly payments, saving money in the long term. An auto loan refinance involves taking out a new secured loan to pay off the existing one, transferring the title to the new lender. Ideally, the new loan conditions will be improved, but refinancing is not always the right choice and depends on your situation. These are some reasons you may benefit from refinancing your car loan:
Reduce Your Interest Rate
One of the best reasons to refinance a car loan is if you have an opportunity to reduce your interest rate. If you previously had no credit or bad credit, it is worth checking into refinancing your car loan after a couple of years to see if you receive better offers. Your credit score may have improved enough to qualify you for a lower interest rate. With a lower interest rate, you will be able to pay off your loan faster or lower your monthly payment while paying it off at the same pace. In either case, you’ll pay less over the life of the loan.
Lower Your Monthly Payment
Sometimes, an expensive occurrence such as having a baby, unexpected medical bills, or a natural disaster can put you in a situation where you have to reduce your monthly expenses. Refinancing might allow you to extend the duration of your loan, thereby lowering your monthly payments. For instance, if you owe two more years on your current loan, it may be possible to refinance and extend the term to four years.
Adding two years onto your loan should substantially lower your monthly payment, depending on the interest rate you get. You will be paying for two years more, but you will free up some cash on a monthly basis, helping you get through a rough patch. Keep in mind, though, that this will also mean that you’ll pay more interest over the total life of the loan.
Changing lenders can be a pro or a con, depending on the relationship you have with your current lender. If your lender has poor customer service, changing lenders could be a benefit. If you like your lender, you can try to refinance with them, but you may need to look elsewhere to get the best rate.
Consolidate to Improve Your Cash Flow
If you currently owe less than what your vehicle is worth, you may be able to access more cash by refinancing your auto loan and using the equity to pay off higher interest debts like credit cards. For instance, if your credit card interest rates are 18% and you can refinance your auto loan to something as low as 2.39%. You can use the equity in your vehicle to pay off your credit card debt. Not only do you end up with a lower interest rate, but you also only have a single monthly payment instead of 2 or more.
The Bottom Line
Consider all of your options before you commit to refinancing your car and check around to see what interest rates are available. Keep the length of the loan as short as your budget will allow. Getting the shortest loan term combined with the lowest interest rate will ensure you are getting the best car loan possible.
Next Steps
- View our Auto Loan Rates to see what rate and term might best suit your financial needs.
- Do you want to learn how much your auto loans monthly payment will be? Try using our Loan Monthly Payment Calculator.
- Talk to Member Services to find out what your options are how refinancing your auto loan could help manage your current debt. They will help you make the best decision and save you money in the end.
