Why Refinance a Car Loan?
Auto refinancing is simply replacing your current car loan with a new one through a different lender. Typically, the goal is to secure a lower interest rate, which drops your monthly payment and saves you money over the life of the loan.
When Refinancing Makes Sense
- Your Credit Score Improved: If your score has jumped since you bought the car, you almost certainly qualify for a better rate now.
- Interest Rates Have Dropped: Even if your credit is identical, federal rate cuts might mean the current market simply offers cheaper money.
- You Didn't Shop Around Initially: Dealership financing (dealer-arranged loans) often includes a markup. A local credit union might offer a significantly better deal.
The Big Risk to Avoid
A major pitfall of refinancing is extending the loan term to get a lower monthly payment. If you have 3 years left on your loan, and you refinance to a new 5-year loan, your monthly payment will plummet, but you will end up paying far more total interest and risk owing more than the car is worth (being underwater). Always try to keep the new loan term equal to or less than your remaining term.
Use a loan calculator to compare your current remaining payments against the new proposed loan.