Refinancing Your Car Loan

This is a quick and painless way to shave dollars off your monthly bill and hundreds of dollars off your total interest paid. Plus, the entire process is easy and takes less than an hour.

Ever thought about refinancing your car loan to capture today’s interest rates? It can be done, even though it’s not all that common. And, unlike refinancing a mortgage on a home, the process is easy, only takes a few hours, and usually costs less than $100. Your only out-of-pocket cost is the title transfer.

So, if it’s that simple, why aren’t more people doing it? One reason is that the difference in your monthly payments once you refinance isn’t nearly as significant as it would be with a home mortgage, since the amount borrowed is less, and car loans are shorter-term loans. But even so, with interest rates on used cars hovering around 5%, an auto refinance might be worth your looking into, particularly if you’ve seen a significant improvement in your credit score since you took out your original loan, or if you didn’t shop around for the best rate on financing the first time.

Still unsure if it’s right for you? Let’s look at an example. If you took out a five-year, $20,000 loan two years ago at an interest rate of 12%, your monthly payment would have been $445. If you were to refinance the remaining amount – about $13,400 – into a three-year loan now, a 2% reduction in interest would drop your payment by about $13 a month. That means you’d save a little more than $400 over the life of the loan, and while that’s certainly enough for the refinancing to pay for itself, that amount might not be enough to get you excited. Let’s say you could decrease your interest rate to today’s current 36-month used car average of 5.34%. That would put you saving closer to $40, or $1,440 over the remainder of the loan — some serious cash.

If that got your wheels turning, here’s how you do the deal:

  • Understand your back story. There are a couple of reasons why your rate might be higher than it should be. The first we already talked about – your credit score. The second, though, is that if you originally financed your car through a dealer, the rate may have been inflated. These days internet-savvy consumers know how much they should be paying for cars down to every last option. That’s trimmed profit on the cars to dealers who make it up in profit on both financing and servicing your vehicle. That’s why it’s just as important to shop around for financing for your car as for the car itself. You’ll want to walk into the dealership having already secured financing from at least one credit union or bank.
  • In the months leading up to you application for a loan, keep in mind that your credit score will directly affect your interest rate. So, be extra careful about paying your bills on time and keeping credit card usage at a minimum (preferably at 30% of your available balance or less.) Also, don’t apply for other cards or loans if you know a biggie — like an auto loan or mortgage — is in your near term future. And don’t close old credit cards you’re not using right now. All of these moves will help make sure your score doesn’t drop before you apply.
  • Find your lender. Once you’re ready to refinance, start price hunting. Many credit unions and small banks have made it a priority to be competitive in this market. Also, if you blew it and took dealer financing that you now know to be too pricey? You can refi immediately after you take out the original loan, if you think you may have been short-changed. Not all lenders who offer auto loans will also offer refinancing, so check again out the offerings at your bank or a local credit union.
  • Don’t stretch your payment term. Extending the life of your loan may indeed lower your monthly payments, but it will cost you more in interest over time — even if you’re able to lower your interest rate. You may be tempted to extend, but your new loan should never be longer than what was remaining on the original.
  • Jean Chatzky

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