Should I Refinance My Auto Loan at a Lower Rate?

Interest rates on loans are at a record low, and you may be considering refinancing your car loan to qualify for a lower rate. When you refinance your original auto loan, you pay off your existing loan and replace it with a new one. Just like your initial loan, the new loan is secured by the car and paid off in equal installments over a set period.

Most people refinance to save money by lowering their monthly car payments, reducing the interest rate, or extending the loan term, or all three simultaneously.

One of the best ways to improve your cash flow is to lower your monthly car payment. If possible, rather than extending the life of your loan and paying more in interest, consider taking advantage of lower interest rates. A lower interest rate also enables you to reduce your payment, shorten the loan term or pay the loan off early.

When Should I Refinance My Car Loan?

Besides lower interest rates, if you have improved your creditworthiness or financial situation since you took out your original loan, now may be an excellent time to refinance your car loan.

When interest rates are lower

A drop of 2 to 3 percentage points on your loan rate can save you a significant amount over the life of the loan as long as you don’t extend the loan term.

If your credit score or financial situation have improved

Improving your credit score by paying your bills, like credit cards, on time can help lower your debt-to-income ratio (your monthly income divided by your monthly debts), enabling you to obtain a lower interest rate. If you have received a pay raise, paid off debt, or had a default or bankruptcy fall off your credit report, you may qualify for a lower interest rate.

You got a bad deal on your current loan

If you didn’t do any due diligence or get pre-approved for a loan from your bank or credit union before entering the car showroom, you likely financed your vehicle through the dealership. Typically dealers don’t quote the lender’s best rates and mark them up to pad their profits.

When financing a loan, shop for the best quote and get pre-approved in advance so you can negotiate with the dealership for the best vehicle within your budget.

Are There Any Drawbacks to Refinancing an Auto Loan?

While refinancing your auto loan has several benefits, there are also some drawbacks, such as a prepayment penalty and paying more interest on the loan.

Prepayment penalty

Many lenders impose prepayment penalties if you pay off your car loan early or switch to another lender, and this may impact your decision on whether your car is worth refinancing.

Extending the loan term costs more

If you decide to refinance your loan at a lower interest rate but extend the loan term, you will pay more in interest for the loan, meaning that the vehicle costs you more in the long run.

Determine if You Qualify for Refinancing

If you are still working on improving your credit, or it’s only been a short period since you got your car loan and the hard pull still impacts your credit score, you may not qualify for the lowest interest rate offered. If this is the case, it’s likely more beneficial to wait until your credit score improves to ensure you get the best rate possible.

If you have missed or were late on any payments or don’t have a long credit history, your credit report may not demonstrate that you can pay on time and earn a lower interest rate. Set up an automatic debit so you don’t miss any payments. If you are just beginning to establish your credit, you can ask someone to co-sign on the new loan to help reduce your qualifying interest rate.

Auto lenders also have rules on which cars are eligible for refinancing. If your vehicle has more than 100,000 miles or a salvage title, you will be ineligible. The lender will also calculate the car’s loan-to-value ratio (LTV), which needs to be less than 125%. To find the LTV, simply divide the current loan balance by the car’s value. Sites like Kelley Blue Book and Edmunds can help you estimate your car’s value.

Auto Loan at a Lower Rate

How to Refinance Your Car Loan

The application process takes about two weeks. The lender may conduct an appraisal of your vehicle, run a credit check, request proof of insurance, and verify your income.

Gather your documents

To qualify for a loan, you’ll need to submit your current loan and vehicle information as well as your legal name, address, Social Security number, proof of insurance, and employment.

Shop for a lender

Apply to different financial institutions such as banks, online lenders, and credit unions. Each application will cause a 5-point drop in your credit score, but if you submit all the applications within 14 to 45 days of one another, they may only count as one inquiry.

Once you are approved, compare the offers you receive. The most critical factor is the annual percentage rate (APR) which includes the interest rate and lender fees. A lower APR means you will pay less in fees and interest. If you are seeking a lower monthly payment, you may decide that longer repayment terms work better for your budget, but the interest rate will be higher. The new lender is responsible for paying off your old loan balance.

T&I Credit Union Can Help You Refinance Your Vehicle

Whether you’re refinancing or looking to finance your vehicle for the first time, you’re seeking the lowest possible interest rate. With large institutions like Bank of America, it can be challenging to secure a loan if you have a bad credit score or get a loan rate you’re satisfied with. By working with T&I Credit Union, you can enjoy being part of a member-owned model that means higher savings and lower interest rates.

At T&I Credit Union, we offer financing options of up to 84 months on new vehicles and up to 60 months on used vehicles. We offer competitive APRs to ensure our members are getting the best deal.

Apply Online Today

Apply for your auto loan conveniently online after supplying us with some key information about your vehicle. We’ll get back to you in 24-72 hours regarding your auto loan approval. If you need support handling your application or have questions about financing or refinancing options, contact us.

About Jeff Jacobs

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