Financial Fundamentals Blog

Should I Refinance My Auto Loan?

A closeup of a toy car and real car keys on top of auto loan refinancing paperworkThe holidays end, and the bills come due. Even if you budget well, the first few months of a new year always feel tight — especially now, when groceries and other goods and services are more expensive because of inflation. When your budget feels crunched, looking for ways to save money and shore up your finances makes sense. 


One possibility many people don’t consider is refinancing an auto loan. Your monthly payment might take up a sizable chunk of your budget, but it’s not necessarily set in stone. You may be able to refinance at a better rate, a shorter term and a smaller payment.


If an auto loan refinance sounds like something that can help you and your family, here’s what you need to know.


Is Refinancing an Auto Loan Worth It?

Refinancing a loan usually is associated with a mortgage or credit card debt — and not with automobiles. After all, cars aren’t paid off over 30 years, and they don’t compound interest the way revolving debt does.


However, new cars are more expensive than ever, and 72- and 84-month loans that were once unthinkable are now more common. That translates to a big payment — sometimes at a not-so-favorable interest rate — spread out over years. For a mortgage, you might not hesitate to refinance to a better payment. If you have several years left on an auto loan, refinancing makes just as much sense.


The idea behind an auto loan refinance is simple: You’re applying for a new loan that, if approved, is used to pay off the balance on the current loan. This can lead to at least one of the following benefits:

  • A lower interest rate, saving you money over the lifetime of the loan
  • A shorter loan term, allowing you to pay off the loan sooner
  • A smaller monthly payment (if you choose to extend the life of your loan), giving more flexibility for the rest of your household budget

Another benefit of a refinance is that you might be moving the auto loan from the automaker’s or dealership’s finance company to your own financial institution. If you have a question or a concern, your local credit union often is much easier to work with than a big, faceless company.


When Should I Refinance My Auto Loan?

Refinancing a car loan isn’t as complex as a home refi. There may be some small incidental fees, such as retitling the car, but you won’t be charged an origination fee the way you would with a new mortgage.


With that in mind, here are some signs that the time may be right to refinance your auto loan:

  • Your credit score has increased: With a higher credit rating, you may qualify for a better interest rate than you could secure when you took out the initial loan.
  • Interest rates are low: Although interest rates have been climbing, they still might be lower than your original loan. Keep your eye on the market rates, and be ready to apply if they drop below your current rate.
  • You have more equity than debt in your car: Although a lender might consider refinancing a car that’s underwater — meaning you owe more than the auto is worth — it’s not recommended. You usually will get the best rates for a car that is holding most of its value.
  • You want to pay your car off sooner: Getting that car payment off your budget feels great, and you might be willing to go with a larger monthly payment to make it happen sooner.

When Isn’t an Auto Loan Refinance Worth It?

As appealing as refinancing your auto loan might seem, it’s not for every car owner. The benefits just might not be there, or something may stand in the way and keep the refi from happening. 


Here are some reasons why an auto loan refinance won’t work for you:

  • Your credit score is low: If your credit rating has decreased or is simply not as high as you would like it, finding a better interest rate might be difficult, particularly in the current economy. Continue to make payments on your current loan, which not only reduces what you still owe but also may boost your credit score.
  • You won’t be penalized for early repayment: The terms of your current auto loan might charge you for paying it off early. This stinks, for sure, and it can be a dealbreaker because you won’t save much by refinancing. If there is a penalty, do the math and see if refinancing is worth the cost.
  • Your car has too many miles on it: In most cases, the more miles on an automobile, the less it is worth — and the less likely lenders will let you refinance.
  • You don’t have much left to pay off your current loan: If you’re within a couple of years of paying off the loan, you may not realize much savings by refinancing.

Refinancing an auto loan can be a smart way to lower your monthly payment and potentially save hundreds or thousands of dollars over the lifetime of the new loan. Whether you are considering refinancing or are in the market for a new or used car, 7 17 Credit Union can help. Check out our auto loans page to learn more about what we offer.