When to Refinance a Car Loan


a cute dog looks outside a car window.

If you have a car, you probably have a car loan. And if you have a car loan, you’re probably interested in finding ways to save money on your monthly payment.


The good news is that when you agree to a car loan, you’re not stuck with it for its entire life. Instead, you can refinance your loan, which can save you a lot of money over the course of the loan’s term.


However, knowing when to refinance your loan can be tricky. You’ll want to make sure you’re saving the most money possible, and the details can vary depending on a number of factors.


We’ve created this guide to help you decide when it makes sense for you to refinance. We’ll explain some common reasons people refinance their car loans and then share some specific considerations for refinancing with you.


Reasons to Refinance Your Car Loan


These are the most common reasons that people choose to refinance a car loan.


1. You cannot afford your car payment


If you find it challenging to make your car payments, you may want to consider refinancing your loan. While refinancing your car loan to lower your payments may mean extending the term and paying more in interest over the life of the loan, the obvious benefit is being able to make your monthly payment.


Refinancing can also free up money in your monthly budget, making your daily life easier and less stressful. In addition, the fees and penalties associated with making late payments can really add up, not to mention the concerns related to the impact on your credit score.


2. Your credit has improved significantly


Your credit score is a significant factor when it comes to the APR you can get approved for. If your credit score has improved significantly since you took out your first loan, it might mean that you can now qualify for much better rates than you could in the past. Because of this, refinancing might save you a lot of money.


3. Interest rates have dropped, or you found better car loan deals


If you’ve been monitoring interest rates and notice they’ve dropped significantly since you took out your car loan, now might be a good time to refinance. Or perhaps interest rates haven’t dropped, but you now realize that the car loan you got wasn’t the best deal.


This could be for several reasons. For example, different types of financial institutions offer different rates. For one, banks and dealerships often offer higher APRs than credit unions since credit unions are not-for-profit.


4. You have money to pay down now that you didn’t have before

Tax time is a common time that you may want to refinance. Applying all or part of your tax refund as a down payment to the lender you refinance with can save you a significant amount of money on interest. After all, the less you finance, the less you pay in interest.

Putting more money down can lower your monthly payment and possibly shorten the term of your loan too.

5. A divorce or marriage makes it necessary to change the name on the loan

If you need to add or remove a name from an auto loan (or title), refinancing may be a good option. The lender will review the loan file with the new applicants and process a new loan. Refinancing, for this reason, may also bring about a change in your interest rate and payment, possibly saving you money.

6. You are unhappy with your current lender

If you are unhappy with your current lender, it might be time to consider refinancing with a new lender. Whether you’re dissatisfied with the fees, service, or loan terms, moving your loan to a new lender can be a game-changer in how you feel about your vehicle loan.

To make sure you don’t trade one less than stellar lender for another of the same quality, do a little homework. Reading online reviews and asking potential lenders questions upfront can help.

7. You want to add insurance or other protection


Not many people know, but you can add an extended warranty, gap protection, and other insurance products to your vehicle loan at the time of a refinance. Often, when you do that, your payment will remain the same or increase only slightly.

Adding that sort of protection may allow you to confidently keep your vehicle instead of buying a new one, potentially saving you thousands of dollars.

Considerations For Refinancing Your Car Loan


A few factors make refinancing better or worse for you, depending on your specific situation.


1. Find out how much time is left on your loan


If you are at the very end of your loan, it may not make sense to refinance for a few reasons.


First, interest is usually front-loaded on car loans, meaning that you pay most of the interest at the beginning of your loan. If you’re nearing the end of the loan term, you are primarily paying off the principal, and you’ll save less money by refinancing.


In addition, while refinancing a vehicle is much less expensive than refinancing a home, you’ll still likely have to pay some fees. The longer you have left on your loan, the more time you’ll have to recoup those fees and make back more money.


Or, you may find a lender that offers an extremely low refinance fee like that here at Telcoe.


Our fee to refinance is under $40.


2. Watch out for prepayment penalties


Some lenders will charge you a penalty if you pay off your car loan before the agreed-upon term. This is a significant concern if you are planning to refinance. You’ll want to check with your original lender and make sure that if there are fees, you’ll make them back — and more — by refinancing.


3. Consider if you are “upside-down”


Being “upside-down” or “under water” on your car loan means that you owe more than the car is worth. This can happen, for example, when you buy a new car with a small down payment. New cars depreciate very quickly in value, meaning that within the first year, you may owe more than the car is worth.


If you are upside-down, you can refinance to try to improve this situation. If you can refinance to a loan with a shorter term or one with a significantly lower APR, you may be able to improve your financial situation substantially.


Avoiding Another Auto Refinance


When you refinance, you’ll want to make sure that the loan you choose is the best you can get. This will help you avoid refinancing again in the future. To do this, you’ll want to shop around and compare rates and terms among various lenders.


Credit unions offer competitive rates for their members. To find out more about refinancing and see Telcoe FCU’s current competitive rates, visit the link below.


Learn more about refinancing your car