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Rethinking Refinancing Your Car Loan: Best Times to Refinance

We need cars. It’s a simple fact of life. We need them just like we need jobs and insurance, and sometimes having one means having (or needing) the other. Most people have their own car because living without one gets difficult, despite the cost.

Having a car usually means either a lease or an auto title loan – or, the ultimate goal: owning a car outright. If you’re on your road to car ownership and steadily paying off your auto loan, you may have thought about refinancing your loan. And if you haven’t, you should!

Unsure about the process of refinancing or what it entails? Don’t worry, we’ve got you. Read on for all you need to know about the best (and worst) time to refinance your car loan.

When Should You Refinance Your Car Loan?

What is refinancing, and should you be doing it?

When you refinance a loan, you get a new loan from a different provider that you use to pay off your old loan. Ideally, your new loan terms are better than your old ones. But first, you need to make sure it’s the right choice for you.

Make sure you are in the position to refinance your car loan before you dive into your research. If you fall into one of the following categories, you might want to consider refinancing your car loan!

Your Financial Situation is Better

If you originally got your car loan when you weren’t in the best financial situation, you might have chosen a long-term loan with smaller monthly payments, so your monthly expenses were more forgiving. If you got a better job or a big expense has gone away, it might be the time to refinance your loan with a higher payment.

While you might not think this is the best idea, it’s a great idea in the long-term. The higher your payments and the shorter the term, the less interest you’ll pay in the end. This means you’ll save thousands on your bottom line!

Refinancing your car loan saving you money? Sign me up!

Interest Rates Have Improved

Perhaps, your financial situation isn’t better, but interest rates are. Well, that is just as much of a reason to celebrate!

While interest rates have gone down a few times in 2018, the trend may be changing. If interest rates are better than when you first got your loan, it would be a great time to refinance. A lower interest rate means you will be able to pay less in the long run. That means you could save hundreds of dollars.

Your best bet would be to keep abreast of interest rates and make sure you know if you aren’t missing your golden opportunity. With that in mind, using tools like Bankrate’s auto loan interest rate comparison is a great idea.

Your Credit Score Has Improved

Another great position for refinancing your car loan is if your credit score has improved. The better your credit score, the less of a risk you look like to lenders.

If you’ve done a good job paying your loan on time (as well as, you know… everything), then your credit score should have improved, which means you could be in the position to get better terms for your loan. You can probably get better interest rates.

You Need Lower Monthly Payments

Let’s say you aren’t in a great financial place or, perhaps, you are in a worse position than you were when you originally got the loan. If that’s the case, you might want lower monthly payments, and one way to do that is to refinance your loan. If you change your loan terms to something longer – from 2 years to 5 years – your monthly payments will be smaller.

Now, take this with a grain of salt because, while this might have short-term benefits, you’ll end up paying more in interest in the long run.

Granted, as far as getting money on a monthly basis, refinancing your car loan might be a better idea than getting a title loan in Arizona on a car you already own if you’re worried about making those monthly payments. But title loans have their place and time. Research and compare your original loan against those offered by traditional and online lenders to see which one works best when it comes to reducing your payments.

Better Available Offers

So, the last reason to look into refinancing your car loan is if you didn’t get the best deal possible. If you got your original loan from a dealership, you probably didn’t get that great a deal. Dealer’s lenders often have markups that benefit both the dealer and the lender, but not you.

Instead look at banks, credit unions, or online lenders, which tend to have better interest rates and terms. You should even look at your own personal bank which might offer better rates for established clients. 

When NOT to Refinance your Car Loan

Timing is important. If you have negative equity on your current loan (you owe more money than the car is worth) then it’s best not to refinance your loan. This means if your car has depreciated in value too quickly for your payments, then it’s not a good idea for you.

Also, if your car is too old, that might also not be worth it. Some lenders also won’t even refinance your loan if your car is too old or if you have too many miles on the car. Another reason not to refinance is if you are already far along in your loan. Interest is frontloaded, so if you’ve already paid off a lot of the loan then you should just see it through. Refinancing at this point would give you no benefits.

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Final Thoughts on Refinancing Your Car Loan

Ultimately, the key here is to know your situation – from your credit score to how much you owe, and everything in between – and that requires research.

You also need to do your homework when it comes to what offers are out there to make sure you’re getting all the best options. If you want to check to see if refinancing is worth it, check out Credit Karma’s auto loan refinancing calculator.

Whether you need to pay less each month or want to pay less overall, refinancing your car loan can lower your monthly payments or minimize your interest with some research, planning, and discipline. Happy refinancing!


Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.

Emma Frost

Emma Frost is a lifestyle and finance blogger with a talent for communication and a passion for financial literacy. She uses her writing talents to explore topics that help her readers gain financial stability and growth.

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