icon of two gears to show concept of expanded lessons Expanded Lesson 4 min read

Should I Refinance My Auto Loan?

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Many of us need to take out a loan to buy a new or used car, considering many makes and models can cost tens of thousands of dollars. However, you don’t need to stick with the original loan you used to purchase the vehicle. Refinancing your current auto loan can potentially help you lock in a lower interest rate, helping you reduce your monthly payments. However, auto loan refinancing isn’t for everyone. Learn about the pros and cons of this option before you sign off on a new loan.

group of friends traveling in a car.
Yellow notepad with pen svg icon Lesson Notes:
  • Auto loan refinancing means you’re replacing your old auto loan with a new one that has different terms and conditions.
  • Benefits of refinancing your car may include a lower interest rate and monthly payment, better customer service and extra cash if you do a cash-out refinance.
  • Consider the costs of the new auto loan, including surprise fees, changing interest rates and origination fees.
  • Contact multiple lenders and compare different loan offers to find the best one for your situation.

What is Auto Loan Refinancing?

Auto loan refinancing is like any other type of refinancing. It replaces your existing auto loan with a new one. The new lender will pay off your old auto loan in full. You will now owe the new lender what was left on your old auto loan. The new loan comes with a new set of terms and conditions, including a new interest rate and monthly payment.

You can also capitalize on your current equity in the vehicle. This is what’s known as cash-out refinancing. The new lender will issue you a new loan for more than what you owe on your vehicle. You can then use this money however you like, such as repairing your existing vehicle or making aftermarket modifications, which can improve the car’s overall value.

You will need to have paid off a certain percentage of your auto loan to qualify for a cash-out refinance. Once you’ve built up equity in the vehicle, most lenders will let you borrow up to 100% of the vehicle’s value. However, you will now owe more than you did before you refinanced the loan. This may increase your monthly payment or extend the loan repayment period. Make sure you can keep up with your new monthly payment, or the lender may be able to repossess your vehicle, which would leave you without a car altogether.

Benefits of Auto Loan Refinancing

There are lots of reasons to refinance your existing auto loan. Be sure to capitalize on these benefits:

Lower Interest Rates

Refinancing can help you lock in a lower monthly interest rate. Find a lender near you that offers lower interest rates, so you don’t have to pay as much over time.

Lower Monthly Payment

You can also use this option to reduce your monthly payment. Find a new loan with lower interest rates and/or a longer repayment plan, which will stretch out the loan over the course of several years or more. This reduces your monthly payment, but you might have to pay more in interest over time.

Use this car affordability calculator to see how refinancing could change your monthly payment.

Extra Cash for Making Repairs

Apply for a cash-out auto loan refinance to access capital based on your existing vehicle equity and value. Calculate how much you will need for repairs and add it to how much you still owe on your auto loan. Find a lender that’s willing to lend you the full amount so you can fix up your car as soon as possible.

Better Customer Service

Some lenders are better than others when it comes to customer service. Auto lending can be complicated, so it’s important to have a trusted financial partner on your side. If you’re fed up with your current lender, find a new company that has your best interest at heart.

Potential Costs of Auto Loan Refinancing

There are several potential downsides to refinancing your auto loan. Make sure these surprise costs and considerations don’t outweigh the benefits.

Check the Terms and Conditions

Before you sign up for a new auto loan, make sure the terms and conditions will help you reach your goals. Watch out for surprise fees, changing interest rates and other potential red flags that might cost you down the line. If you have any questions, the loan officer should be there to help you find the information you need.

Origination Costs

Starting a loan will incur some additional fees, some of which are unavoidable. Most lenders will charge you 2% to 5% of the total loan amount when issuing your new auto loan. Make sure you can afford to pay these fees before starting the lending process.

Potential for Repossession

With any refinance, it’s always important to make sure you can afford your new monthly payment. The bank or credit union will own your car outright if you fall behind on these payments.

How to Refinance Your Auto Loan

If you’re ready to swap out your auto loan for a new one, follow these steps to lock in the best possible rate:

Check Your Current Loan

The first step is to review your existing auto loan. You should know how much you still owe your current lender. Find your current monthly payment and interest rate. If you plan on applying for a cash-out refinance, calculate how much extra money you will need on top of your current loan balance.

Contact Lenders

Now it’s time to start contacting various lenders that offer auto loans. Most companies will ask for information about your vehicle, including the make, model, how many miles are on it, the vehicle identification number (VIN) and your car registration. They will also need to look at your current loan terms and conditions.

Compare Loan Offers

These lenders will then issue you a series of options for refinancing your auto loan. Review the terms and conditions for each loan and choose the one that will help you save money over time. Look for the lowest interest rate with an affordable monthly payment.

Apply for the New Auto Loan

Once you find the right lender, it’s time to put the plan into action. You will need to apply for the new loan with your chosen lender. This may take several business days. The lender will need to run a check on your credit score and prepare the new documents. The lender will then close out your old auto loan and issue you a new one. Once the old loan is closed, you’ll start making the new monthly payments.

Auto lending doesn’t need to be complicated. Use this guide to make an informed decision when refinancing your car or vehicle. Contact the professionals at Ent Credit Union to learn more about your auto lending options.

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