Is It Time to Refinance Your Auto Loan? Key Factors to Consider
Refinancing your auto loan can help you save money, lower your monthly payments, or pay off your car faster—but timing is everything. This blog breaks down the key factors to consider, including interest rates, credit score improvements and loan balance. Learn when refinancing makes sense, when it doesn’t, and how to determine if it’s the right move for you.
1. Interest Rates Have Dropped
Why it matters: If the interest rates have decreased since you initially took out the loan, refinancing could help you secure a lower rate. A lower rate can potentially reduce your monthly payment or shorten the loan term without increasing your payment. Check out Extraco's current rates below.
When to act: Compare current rates with your existing loan rate. If there's a noticeable difference, it might be a good time to refinance.
2. Your Credit Score Has Improved
Why it matters: If your credit score has significantly improved since you originally took out the loan, you may qualify for a better interest rate. A better rate can save you money over the life of the loan.
When to act: If your credit score is higher than it was when you first financed your car, refinancing could be worth considering.
3. You Want to Lower Your Monthly Payment
Why it matters: If you're struggling with your monthly payment, you can extend the term of your loan which can lower your payments. However, keep in mind that extending the loan term could result in paying more in interest over the long run.
When to act: If your budget is tight and you need more flexibility, refinancing to reduce the monthly payment could be a good option.
See If Our Team Can Help Lower Your Payments Calculate Your Monthly Payment
4. You Want to Pay Off the Loan Faster
Why it matters: If your financial situation has improved and you're in a position to pay off your loan faster, refinancing into a shorter-term loan can help you save money on interest while paying off the car sooner.
When to act: If you're financially comfortable and want to get rid of the loan quicker, refinancing into a loan with a shorter term can be a smart move.
5. The Loan Balance Is High
Why it matters: Refinancing might not make sense if you owe very little on the car. If the loan balance is low and you’re close to paying it off, the potential savings might not outweigh the fees and effort involved in refinancing.
When to act: Consider refinancing if you have a reasonable balance left on your loan, and the savings from a lower interest rate would justify the refinancing fees. Currently, Extraco is proud to offer no fees on refinanced loans!
6. You’ve Been Paying on the Loan for a While
Why it matters: The longer you've been paying on the loan, the more equity you’ve built up in the vehicle. If the car is worth more than the remaining balance, you may have more favorable refinancing options available.
When to act: If you're a few years into your loan and the car's value has held up well, refinancing could be a good option. You may want to refinance especially if you've paid down a good chunk of the principal.
7. You Are Stuck with a High-Rate Loan
Why it matters: If you initially took out a loan with a high-interest rate, like if you had a lower credit score at the time, refinancing could help you reduce the rate and save on interest in the long run.
When to act: If you're stuck with a high-interest rate and your credit situation has improved, refinancing is an effective way to take advantage of better terms.
When NOT to Refinance:
Your car is worth less than the loan balance (Upside Down Loan): If you owe more than the car is worth (i.e., you’re upside down), refinancing might not help. It could be more difficult to find favorable terms.
You have a prepayment penalty: Some auto loans have penalties for paying off the loan early. Make sure to check your loan terms before refinancing.
Your loan is almost paid off: If you’re near the end of the loan term, refinancing may not provide enough savings to justify the hassle.
How to Determine if Refinancing Is Right for You:
Compare current rates: Check interest rates offered by other lenders, including banks, credit unions and online lenders.
Calculate the savings: Use an auto loan refinance calculator to see if the new loan terms will save you money on interest or monthly payments.
Factor in fees: Be sure to consider any fees associated with refinancing, such as application fees, loan origination fees or prepayment penalties.
