When should I refinance my car loan?
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Written by
Sara Routhier
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Reviewed by
Joel Ohman
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UPDATED: Dec 9, 2011
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A borrower should refinance their auto loan if they will acquire lower interest rates or lower monthly payments. In the best cases, a refinance will produce both those benefits.
Interest Rates and Monthly Payments
If a borrower notices interest rates and financing deals on commercials, they may able to use that as leverage for refinancing their vehicle. This is particularly true if the borrower obtained financing from an auto dealership as opposed to a traditional lending source. If an existing auto loan’s rates are higher than the going rates, then a borrower should absolutely refinance if they qualify for one.
As so many home owners are currently experiencing, upside-down loans are horrible and demoralizing. That is no different for vehicle owners. Fortunately, a refinance can help turn financing right-side up again, reducing monthly payments and restoring equity in a purchased vehicle. Though refinances aren’t always granted to those with upside-down loans, it’s at least worth an attempt.
But even in cases where auto loans aren’t upside-down, refinances can still result in lower monthly payments.
Cost vs. Benefit
Borrowers need to do a cost analysis before committing to any refinance of an existing loan. A cost analysis consists of taking a look at the total amount a borrower would owe on an existing auto loan. Then they would subtract the total amount of savings they’d acquire from the refinance. Finally, take that result and subtract all fees required to obtain the refinance.
If the final product is less than the total that the borrower would owe on the original loan, then pursuing a refinance is probably a good idea.
Borrowers need to also consider any prepayment penalty that their original auto loan might carry. Prepayment penalties are defined in the contract that’s signed when taking out the financing. They require a borrower to pay a penalty if they pay their original loan off early—which they would be doing if they refinance.
Common Prerequisites
Some common prerequisites to qualifying for an auto loan refinance include:
- Outstanding loan balance of $7,500 to $30,000
- Vehicle must be less than 5 years old
- A moderate to high credit score
These are just a few common requirements for refinancing, but they are not set in stone. Different lenders have different standards, so just because one refuses a refinance, it doesn’t mean another won’t grant one. Meeting with a bank representative, or filling out a refinance request form online can provide a borrower with valuable information regarding a refinance loan.