How to Refinance Your Car Loan and Save Money

What Is Car Loan Refinancing?

Auto loan refinancing is the process of taking out a new car loan to pay off an existing auto loan. The new loan replaces your current one, and you continue making payments—often with different terms, such as a lower interest rate or a shorter or longer repayment period.

Refinancing can lower your monthly payments and reduce the total interest you pay over the life of the loan, especially when interest rates have dropped since you originally financed or when your credit score has improved.

Sources: Certified AutoBrokers Inc., Bankrate, RateGenius, Car and Driver

Benefits of Refinancing

Refinancing can offer several advantages, but the two most common goals are lowering your monthly payment and reducing the total interest you pay over the life of the loan. These benefits are most achievable when market interest rates are lower than your current rate, or when your creditworthiness has improved since you took out the original loan.

Another reason to refinance is to change the length of your loan term. For example, you might extend the term to reduce your monthly payment, or shorten the term to pay off the car faster and save on interest. However, extending the term can also increase the total interest paid over the life of the loan, so it's important to weigh that trade-off.

• Lower monthly payment
• Reduce total interest paid
• Change loan term (shorter or longer)
• Potentially get a better interest rate due to improved credit or market conditions

Sources: RateGenius, Car and Driver, Members Choice Credit Union

When to Refinance (and When Not To)

Refinancing makes the most sense when you can secure a lower interest rate, which will reduce your monthly payment or the total interest you pay. If interest rates have dropped since you took out your loan, or if your credit score has improved, you may qualify for a better rate.

However, refinancing may not be advisable if you are close to paying off your current auto loan, because most of the interest is paid in the early years of the loan. In the later stages, the amount of interest you could save is minimal, and the fees involved might outweigh any benefit.

Additionally, if you owe more than your car is worth (negative equity), refinancing could be difficult. Lenders may be reluctant to approve a loan for more than the vehicle's value, and you may need to pay the difference out of pocket.

• Consider refinancing when: interest rates have fallen, your credit has improved, or you want to change your loan term.
• Avoid refinancing when: you are close to paying off the loan, you have negative equity, or the fees and penalties wipe out your savings.

Sources: RateGenius, Car and Driver, LendingTree

Steps to Refinance Your Car Loan

Refinancing an auto loan generally follows a straightforward process. Here are the key steps to take, based on guidance from financial institutions and auto experts.

1. Check your credit score and review your credit report for any errors. A higher credit score can help you qualify for a better interest rate.
2. Compare offers from multiple lenders, including banks, credit unions, and online lenders. Look at the annual percentage rate (APR), which includes both the interest rate and any fees, to get a complete picture of the loan cost.
3. Gather the necessary documents, such as proof of income, proof of insurance, and your current loan details.
4. Apply with the lender that offers the best terms. Multiple applications within a short period (typically 14–45 days) count as a single credit inquiry, minimizing the impact on your credit score.
5. Review the Truth-in-Lending disclosure provided by the lender, which must include the interest rate, finance charges, and monthly payment before you sign.
6. Once approved, the new lender will pay off your existing loan, and you'll begin making payments on the new loan.

Sources: RateGenius, AutoInsurance.com, Car and Driver, Consumer Financial Protection Bureau

How to Compare Refinance Offers

To find the best refinance deal, you need to compare offers from several lenders. Key factors to compare include the APR, the monthly payment, the loan term, and any fees. The APR is particularly important because it includes both the interest rate and any lender fees, giving you a more accurate cost comparison.

When you receive offers, look at the total cost over the life of the loan, not just the monthly payment. A lower monthly payment might be the result of a longer term, which could mean you pay more interest in total.

• Compare APRs, not just interest rates.
• Consider the loan term and total interest paid over the life of the loan.
• Factor in any fees, such as application fees, title transfer fees, and prepayment penalties.

Sources: Consumer Financial Protection Bureau, RateGenius, Members Choice Credit Union

Costs and Fees to Watch For

Refinancing is not free. Lenders may charge an application fee and a credit check fee. There may also be title transfer and registration fees, which vary by state. In addition, your original loan may have a prepayment penalty, which can reduce or offset the savings from refinancing.

Before you commit, ask each lender for a complete list of fees, and calculate whether the savings from a lower interest rate outweigh the upfront costs.

• Application fee
• Credit check fee
• Title transfer fee
• Registration fee
• Prepayment penalty (on your original loan)

Sources: RateGenius, Members Choice Credit Union, Consumer Financial Protection Bureau, Car and Driver

Break-Even Analysis

A break-even analysis helps you determine whether refinancing will actually save you money. The idea is to calculate how long it will take for the monthly savings to cover the upfront costs of refinancing. If you plan to keep the car beyond that point, refinancing can be worthwhile.

To do this, you need to know the total fees and any prepayment penalty, and the reduction in your monthly payment. Divide the total costs by the monthly savings. You can perform this calculation yourself using a simple formula.

• Gather total costs (fees + any penalties).
• Determine your monthly savings from the lower payment.
• Divide total costs by monthly savings to find the break-even point in months.
• If you plan to keep the car longer than the break-even period, refinancing may be a good idea.

Sources: RateGenius, Members Choice Credit Union