If you purchased a car and financed it for several years, a lot may have changed since you bought it. Your credit may have improved or interest rates went down, which means the lowest auto finance rates are available to you. Or changes in your income or budget mean that you can’t afford your monthly car payment and refinancing an auto loan to save money is vital.
The Simple Dollar Simple Score is designed to help you find the best places to refinance auto loans. We evaluated features such as interest rates, fees, loan lengths and car restrictions from a variety of auto refinance lenders to help you search for the best places to refinance an auto loan.
Auto refinancing loans at a glance
*Rates accurate as of December 2, 2020, and exclude autopay discounts.
What is an auto loan refinance?
Refinancing your auto loan involves replacing your current loan with a new one. Your existing auto loan is paid off by your new lender and you repay your new lender according to the rates and terms of your new loan.
Although refinancing auto loans often mean moving from one lender to another, it is possible to negotiate a more suitable deal with your current lender. This is particularly the case if you’ve demonstrated a history of on-time payments.
While it’s often described as a great way to put money back into your pocket, refinancing isn’t the right move for everybody. It’s important to understand what refinancing your auto loan means and how to find the best refinance auto loans on the market today
How refinancing an auto loan works
If you’ve had your auto loan for a while, there’s a chance you could secure a lower rate through refinancing. Perhaps your income has increased or your credit score improved and you’re sure you can get a better interest rate.
Refinancing then is all about ensuring you’ve got the best deal by reviewing your current loan and comparing it to current auto loan rates. It’s also about analyzing the benefits — and costs — of replacing your loan.
So why refinance? First, a lower rate means smaller monthly payments. If you’re paying monthly fees on your auto loan, then switching to something with lower or no fees could save significant amounts over the life of the loan.
Some borrowers refinance auto loans to extend their loan term. While this will generally lead to paying more interest overall, it frees up monthly cash flow and is an important fallback for someone experiencing financial difficulties.
Refinancing auto loans means agreeing to new contractual terms. Apart from the interest rate on the loan, other important loan features to consider include the repayment period or loan term and if there’s a balloon payment at the end of the loan period.
You may choose to extend your auto loan term to lower monthly payments, but you will owe money for longer, and this usually leads to paying more interest overall.
Some auto loans have lower monthly payments then a much higher final payment, called a balloon payment, at the end of the loan period.
When refinancing, you could be offered a lower or higher interest rate depending on the strength of your credit and whether general interest rates have gone up or down. Refinancing your auto loan is unlikely to make financial sense with a higher rate because your monthly payments will be greater. Conversely, a cheaper rate will lower your monthly payments.
In fixed-rate auto loans, the interest rate will remain the same throughout the loan period, and this results in predictable repayments. In variable auto loans, the lender can adjust the interest rate, so your repayments can get bigger or smaller over time, although variable auto loan rates are extremely uncommon.
Even when you have found the best auto loans on the market, you’ll still need to check that your vehicle is eligible for financing or refinancing with those lenders. Common restrictions relate to the age, mileage, value or purpose of the vehicle.
These restrictions exist because lenders want to ensure your vehicle is valuable enough for you to keep paying off your loan. In secured loan arrangements, lenders are also looking to reduce the risk of losing money by financing only easy-to-sell vehicles that hold up in value.
Each lender will have its own vehicle eligibility criteria. However, you may find it more difficult to find auo refinancing if your car is:
- More than 10 years old
- Has 125,000 miles or more
- Used commercially or for a business purpose
- Valued at less than $6,000
Refinancing vs. selling your car
If you’re finding your monthly repayments unaffordable, an alternative to auto loan refinancing is to sell your vehicle and pay off the loan, then trade down to something cheaper.
Starting over with a new auto loan allows you to find a better deal and potentially negotiate a cheaper rate and/or a longer loan term. Given the general decline in interest rates due to COVID-19 and smaller loan sizes, this strategy could be effective in lowering monthly repayments.
However, unless you’ve fallen out of love with your car and desperately want a new one, refinancing is by far the easier option to reduce your monthly repayments. Not only is selling a vehicle under finance tricky, but there’s also a risk that your vehicle is worth less than you owe, meaning you’ll have to find extra cash to pay off the old loan.
In short, refinancing can yield similar benefits but avoids the hassle of selling a vehicle under finance. If your car is in good condition, then the refinancing strategy will also give you a chance to sell the car yourself once the loan has been paid off.
When should I refinance my auto loan?
There are many circumstances when refinancing auto loans can put you ahead financially. One of the best times to consider this strategy is if your credit has improved since you took out the previous loan. You’ll likely qualify for a cheaper loan with a better credit score, at least six to 12 months of on-time payments, a higher income and a lower debt-to-income ratio.
For some people, replacing their auto loan is about achieving improved cash flow. For example, if you’re in financial difficulty, extending your loan can lower monthly payments and free up more cash. However, bear in mind a longer loan term usually means paying higher overall interest.
It makes sense to refinance as long as the savings exceed the costs from taking out a new loan. Remember, refinancing can involve upfront application fees and early repayment penalties on your current loan.
What you need to know about refinance car loan interest rates
Like auto loan rates for a new vehicle purchase, refinance rates for car loans have also been falling in line with federal rate cuts. Because of the coronavirus pandemic, federal interest rates dropped to near 0% in March 2020. This drop in rates makes auto loan refinancing an attractive money-saving strategy for those who have had their auto loan for 12 months or more.
Generally, average auto loan refinance rates are cheaper than new finance rates for either a new or used vehicle. Auto loan refinance rates work in the same way as interest rates for a new purchase, which means the stronger your credit, the cheaper your rate and your loan will be.
Refinancing an auto loan with bad credit
Refinancing an auto loan is possible even if you have bad credit, though it may take more planning and effort.
Whether your credit is strong or less-than-perfect, it’s essential to check your credit history and credit score at the start of the process to make sure it’s accurate.
You’ll want to know whether your credit has improved since you took out your old auto loan. If it has, then you’re in a better position to refinance at a lower rate. But if it hasn’t, then you could consider refinancing with a cosigner who has better credit than you to strengthen your application.
In the current environment where auto loan rates are on the decrease, making a stronger application through improved credit or adding a cosigner will give you a good chance to secure a lower rate.
While there are finance lenders that specialize in lending to borrowers with bad credit, your current lender might be open to renegotiating or refinancing your loan, too. But you lender’s willingness largely depends on whether you have demonstrated a history of responsible financial behavior.
For borrowers who can wait, improving your credit score before making a refinancing application could result in a better deal. Effective credit-building strategies include making on-time payments and utilizing less of your available credit. You can also try to lower your monthly payments so it’s easier to meet your obligations. But as mentioned, extending your loan term could lead to paying more interest overall.
How to refinance your auto loan
Here’s a step-by-step guide to help you with refinancing your auto loan.
- Check that you are up-to-date with your payments. Lenders are more likely to approve your application if you have a history of on-time payments on your current loan.
- Check your credit report to verify its accuracy.
- To decide whether you’ll benefit from refinancing, review over your current loan terms including any exit or prepayment fees. You’ll also need to know your current debt amount and when the loan period will end. If your loan has less than 12 months left, then the cost of refinancing may outweigh potential savings.
- Determine your vehicle’s worth using online estimation tools such as those from Edmunds. If your vehicle is worth less than you owe, then you may find it more difficult to qualify for refinancing loans.
- Shop and compare. The best place to start is online, as you can compare multiple deals in little time. Apart from the interest rate, look out for other loan terms such as any early repayment fees, application fees and origination fees. As part of this step, you can apply for pre-qualification to get an interest rate estimate from different lenders.
- Gather paperwork. Once you have identified a deal that suits you, gather your personal, income, loan and vehicle documentation.
- Apply for the loan and once approved, give the 10-day payoff amount to your new lender.
- Continue making payments to the previous lender until the transaction is finalized. You’ll likely get an email or a letter in the mail detailing the final payment on your old loan.
- Start making payments to your new lender.
How to choose the best auto loan refinance for you
The best auto loan refinance product is one that matches your circumstances and offers an attractive interest rate. Here are some steps to find your ideal loan.
- Shop around. Comparison websites are often a good starting point because they allow you to evaluate multiple lenders’ rates quickly. You’ll also find basic product information like the size of loans, length of borrowing and whether loans are fixed or variable. Shortlist at least three providers with products matching your needs.
- Check the fine print. Take a closer look at the lenders on your shortlist and understand their products. Determine if you’ll meet their eligibility criteria, paying attention to things like vehicle restrictions, minimum loan amount and credit requirements. Are there fees you should be aware of, like early repayment or application fees?
- Apply for pre-qualification. This gives you an estimate of the rate you’ll be offered by the lender. If you apply to multiple lenders within a short period, it’ll likely be treated as a single inquiry on your credit file.
- Do the math. Getting a lower refinance rate doesn’t always mean you’ll be better off financially, as you’ll need to account for entry and exit fees. The same goes for lower monthly repayments because if you’re paying less over a longer timeframe, the cost of your loan overall could actually be higher. Work out the total cost of the refinance loan to make sure savings outweigh costs.
- Pick the best deal. Then make a full application.