Automotive Loan Refinance 101

You may associate the term “refinancing” with a mortgage or a student loan. However, almost any loan can be refinanced if the conditions are correct, including an auto loan.

Why would you consider refinancing an auto loan?

For the same reason you would refinance any loan — you are able to realize financial benefits. You may be able to trim your monthly payment down to reduce pressure on your budget, or find a loan that allows you to pay off the balance quicker and save on interest costs.

Julie Olian, Vice President of Communications for the lender LightStream, provides some examples of when auto loan refinancing may make sense for you: “If your credit has improved since your initial financing, you may qualify for a lower interest rate. You may be eligible for a better interest rate than you received from a dealership.” Other possibilities include removal of a co-signer on an existing loan, unplanned expenses or income loss that makes your current payment difficult, or interest rates that have fallen so much since your original loan that the savings are too great to pass up.

Olian sums it up nicely with a simple observation, “There’s no point in paying too much interest.” Why would you pay more than you have to, under any circumstances?

Does an auto loan refinancing sound appealing to you?

If so, make sure that you are in a proper position to take advantage. Review your credit report to make sure that there are no surprise issues that would undermine your qualifications. Verify that your existing loan has no prepayment penalty that would neutralize your savings.

Use a site such as KBB, AutoTrader, or Edmunds to determine the proper current value of your car and verify that there is a suitable gap between the value of your car and the remaining loan balance. Lenders will not refinance an underwater car (owing more than the car is worth) any more than they would an underwater home.

Don’t forget to consider your feelings toward the car — are you planning to keep the car long enough to make refinancing viable?

Finally, consider the age of your car and the overall loan balance. It’s difficult to find financing for older, higher mileage cars or loan amounts greater than $100,000 or less than $5,000. The closer you are to a boundary, the more likely it is that your rate will be less favorable or that your required credit score will need to be higher.

If you plan to move forward, set your refinancing goals (such as lower monthly payments or lower total costs) and use an online auto refinance calculator to explore the possibilities. If your current lender doesn’t have one on their website, there are plenty of others to choose from. By running different scenarios on these calculators, you can define the acceptable boundaries as you go rate shopping.

Consider your other financial accounts and preferences as you review auto-financing options. You may be able to combine services to receive a lower rate. For example, if you have an existing checking or savings account with a bank, you may be able to parlay that account into an interest rate discount or improved terms on your auto refinancing through that bank.

Don’t limit your search to any one style of financial institution. Banks, credit unions, and online lenders all offer a variety of rates, convenience, speed of approval, and flexible terms. Look for AutoPay options and other variations that may reduce your interest rate and/or improve convenience.

Good luck with your auto-loan-refinancing search, and remember to keep your goals in mind. Regardless of how many interesting options you discover, there must be a financial benefit at the end of your search.