When Should I Refinance My Car?

Refinancing a car loan might sound complicated, but it's actually a simple concept that could help you save money and make your monthly payments more manageable. It all depends on a few important factors, including your credit history, current interest rate and payment — and financial goals.

Let's take a look at when it may be best to refinance your car loan, so you can worry less about how you'll make your monthly payment and more about moving ahead.

How does a car refinance work?

When you refinance, you replace your current loan with a new one, usually with a different lender. The new loan pays off your old loan, and you start making payments on the new loan instead.

Depending on your credit history and financial situation, auto loan refinancing could lower your interest rate and/or change the duration of your loan, which may lower your monthly payment.

Although each lender has their own set of requirements, most consider the following information when approving a new loan:

• Payment history
• Credit score
• Income
• Length of your current loan
• Balance left on your loan
• Age and mileage of your car
• Type of car you own

When should you refinance your car?

As with many decisions, timing is everything. Knowing when you should refinance your car can help you determine the right time to make such an important financial decision. Consider refinancing when:

Your credit history has improved

Did you have less than perfect credit when you purchased your vehicle? When you first bought your car, you might have received a higher interest rate because lenders saw you as a higher risk. With a stronger credit history, you can show that you're more reliable about repaying loans.

If your credit history is better now, it’s worth checking with lenders to see if you might qualify for a lower interest rate, which could help you save money on interest over the life of the loan.

Your circumstances have changed

In addition to your credit score, factors such as an increase in income and longer work history can also mean a more balanced application. Maybe you've landed a better paying job, or you've been at your current job long enough to show stability. These changes can make you a more attractive borrower to lenders, who now may be willing to offer you better loan terms.

You want a lender that better fits your needs

All lenders are not alike. If you haven’t been satisfied with the customer service you’re receiving from your current loan company, you may want to do a little research to find a lender with a proven history of quality financial services and a solid track record of customer care.

At OneMain, we work with a wide range of credit scores and take your whole financial picture into account to find a loan that’s right for you.

You want to lower your interest rate

The U.S. Federal Reserve sets interest rates, which affect banks, credit unions and other lenders. In turn, the lenders use that rate as a basis for determining how much interest they will charge to their borrowers. If the federal funds rate takes a dip, it may be a good idea to check out how lenders are reacting. With the right timing, you may be able to lock in a lower interest rate for a new car loan by deciding to refinance.

The Interest rate makes a difference in both the size of your monthly payment and the total interest you pay over the life of the loan. Lowering your interest rate by a point or two could save you money in the long run.

You need to make room in your budget

Financial hardship can happen to anyone. If your car payment is stretching your budget, refinancing under the right circumstances could help lower your monthly payment by extending the term of your loan. For example, if you extend the term from 48 months to 60 months, your monthly payment could be lower. However, be aware that extending the term of your loan may increase the total amount of money you have to pay back by the end of the loan term.

While these are the most common reasons car owners consider refinancing their auto loans, it's important to ask yourself more questions before deciding if refinancing is right for you.

When should you not refinance your car?

Bad timing can mean unwanted results. You may want to think twice about refinancing if:

You're overpaying for what your car’s worth

If you’re upside down on your loan, refinancing may make matters worse, because it adds to the overall cost of the car. Being upside down on a loan simply means that you owe more than what your car is worth.¹ In this case, lenders may be less likely to finance a loan amount that’s higher than the market value of the car.

You have recent credit inquiries

Applying for multiple loans or lines of credit, including an auto refinance loan, within a short period of time can negatively impact your credit score and could result in higher interest rates and less desirable loan terms.

Your current loan has prepayment penalties

A prepayment penalty is a fee that some lenders charge a borrower who pays off the loan ahead of schedule.² If your loan terms include a prepayment penalty, you’ll need to pay it when you refinance.Penalties tend to be around two percent of the remaining loan balance but check your loan agreement for the specifics. If the prepayment fee is greater than savings you might get from refinancing, it may not be in your best interest to refinance.³

Does refinancing a car boost your credit score?

When you check for prequalified loan offers, you initiate a soft inquiry on your credit report, which does not affect your credit score. Applying for an auto refinance loan will trigger a hard inquiry on your credit report, like when you apply for a credit card or personal loan. Hard inquiries can negatively impact your credit score by a few points and remain on your credit for up to two years.⁴

If you're approved for the refinance and you build a steady history of on-time payments, you could see a positive impact on your credit history over time.

Things to consider before refinancing

Before you decide to refinance your car loan, think about these things:

• Loan fees: Some lenders charge fees for refinancing,like an origination fee, which is a one-time, upfront fee the lender charges to process your loan. The origination fee can increase the overall cost of the loan and reduce the amount you receive or have available to pay off your existing loan. Origination fees vary from state to state. Make sure the savings you’ll receive from refinancing are worth the cost.
• Loan term: Extending your loan term by months or years may lower your monthly payment amount but might end up costing you more interest over time.
• Vehicle age and condition: Some lenders won't refinance older cars or those with high mileage.
• Credit score: A higher credit score could help you get a better interest rate, but applying for loans with many lenders at once could lower your score. Refinancing your car loan involves a hard inquiry on your credit report, potentially lowering your credit score temporarily.

Is refinancing the right choice for you

If you love your car but not your current loan terms, refinancing may be for you. In most cases, the goal of refinancing your loan is to get a lower interest rate and save money over the life of the loan — or to make your monthly payments more manageable.

---

---

While everyone’s situation is different, take time to consider the pros and cons of refinancing, review your goals and make sure that refinancing can help you achieve them.

Sources

1. https://www.bankrate.com/loans/auto-loans/upside-down-car-loan/
2. https://www.consumerfinance.gov/ask-cfpb/can-i-prepay-my-loan-at-any-time-without-penalty-en-843/
3. https://www.bankrate.com/loans/auto-loans/car-loan-repayment-clause/
4. https://www.bankrate.com/credit-cards/advice/how-credit-inquiries-affect-credit-score/