Should I Refinance My Car?
Advice on guiding you through refinancing to lower interest rates
Published September 13, 2012 | Updated March 26, 2019
The murky world of car finance is difficult for most people to navigate, and many get it wrong, often paying for their mistakes for years afterward in the form of much higher interest rates than they should be paying, sometimes triple what those of us with good credit would pay. Here at CarBuyingTips.com people often ask our consumer advocate team "should I refinance my car?" It seems complicated to them, they also ask "can you refinance a car loan?" and even "How do I refinance my car?"
We will clear the air on these common auto finance questions, make it simple for you to understand, and steer you through all the confusion surrounding car loans and obtaining a lower rate APR loan.
To be or not to be - to refinance or not, that is the dilemma. First, let's make sure we are on the same page with an understanding of what refinancing a vehicle is before we determine whether it is prudent to refinance our existing car loan. The refinance process simply means you are paying off the existing auto loan and replacing it with a new auto loan with new terms and lower interest rate.
Be sure to read our guide on Car Loan Financing Tips and Scams. Don't car shopping until you have read that guide first or you will not be properly prepared to buy a car, and read our other Guide To Refinancing Your Car Loan to get your monthly car payments reduced lower.
How to tell if you are a good candidate for refinancing your car loan
Typically, if today's APR (interest rate) for refinancing your car loan is at least 2% lower than the original APR you got on your current loan, then it makes sense for you to try to refinance your car loan to a lower APR. Here is an example: With a $20,000 car loan at 60 months and 8% APR, you could drop your monthly payment from $406 to $386 by refinancing your auto loan down to 6% APR, saving you hundreds over the life of your auto loan.
It is best for you to use a loan calculator tool to compare multiple car loan scenarios at once.
We have a 4-way loan scenario spreadsheet for you in our free download area, called the 4 Scenario Loan Spreadsheet. With this useful spreadsheet, you can see at a glance up to 4 car loan scenarios for what your monthly payment might be with different interest rates. Feel free to experiment, you can change the number of months in your car loan and see how that affects both your payments and your savings over the life of your car loan.
Applying for car refinancing with an online lender
Most lenders don't refinance their own loans, so you normally have to find a different lender such as LightStream and CARCHEX. By applying online, you avoid many of the common car financing scams in the car dealer finance manager offices and you are shown your car loan APR and how much you could save in minutes. Now you know the criteria to determine whether you should redo your loan.
With online lenders, you typically download the loan documentation, sign it, FedEx it back, and they pay off your current loan in about a week. Then your new car loan will be with the new lender at a lower interest rate, and your savings will begin immediately.
Can I Refinance a Car Loan?
Many consumers were so duped by the car dealer they don't even know it's possible to get out of their loan. Many car buyers rush into dealers with no financial budget or credit check planning first to buy new cars, not knowing their credit score and forgetting they have a checkered past with making payments on time. There's damage on their credit file that they could have easily repaired first, and it all comes to bite them in the rear, and they get stuck paying 15% to 25% APR.
Referring to the above referenced $20,000 loan, if the car buyer got stuck with a 15% APR their payments would be $475 and cost over $4000 extra in interest. They have no idea that they could be paying down near 6%, which would save them thousands. Yes, you can indeed refinance your car loan.
There must be thousands of people out there, maybe even you, paying way too much APR because the car dealer lies to you about your credit score. One benefit of refinancing is now that you are taking on a loan with different terms, you could spread out the months from 48 to 60, which lowers your payments and gives you breathing room, but costs you more in interest.
Our consumer advocate team recommends you choose the fewest months possible to pay off your new loan; you'll save the most money in interest payments over the life of the loan. If you can handle a 24 or 36-month loan, you'll pay off sooner, and you'll go without a car payment for a few years until you buy your next new car.
How Do I Refinance My Car?
Work to Improve Your Credit Score and get your debt load down first
Your first strategy is to work on getting your credit score up as high as you can. You must remove the root cause of your high APR in the first place, assuming the car dealer was not lying when they told you that your credit was bad. Therefore, why we always tell you to buy your credit report from Experian, TransUnion or Equifax with the credit score option.
Obtaining your credit history file only without the credit score option is useless to you, because you need that credit score data, just like your doctor needs your blood pressure when you go in for an office visit.
Do not apply for any car loans while in a dispute with a credit bureau
Once you obtain your credit report, go through it like a fine-toothed comb. Locate and remove errors or stale data by contacting the creditors who put them there. Also dispute any undeserved bad credit report items with the credit bureaus, which have 30 days to respond by law and they are required by federal law remove them if they cannot get an answer from the creditor as to why they put the ding on your credit report.
You can convince some creditors to remove black marks if you have paid them off already. Our team here at CarBuyingTips.com have worked closely with and helped many car shoppers. You'll be surprised how willing some of your creditors will be to remove black marks, especially if you paid them off. A 10-minute phone call to a few companies can bump up your score 50 points. We've been there and done that with many consumers.
Each ding you get removed from your credit report can improve your score 10 points or more by the next month after its removal. Therefore, we tell you to wait 6 months after buying your car before you refinance.
You need that time to clean up your credit history and have 6 months of on-time payments with your current loan. Most black marks on your credit report will drop off after 7 years, so your score automatically improves over time.
Lastly, pay down any credit card balances you have as low as possible, you must pay off any overdue bills. Get your debt load way below the 30% mark if you can. Creditors get squeamish when your debt load is above 30%, they get nervous about your ability to pay them back, and they often will reject your car loan refinancing application.
The lower your debt balances are, the more likely a lender is to approve you, and with favorable lower rates. If your credit is bad, it should be your ongoing mission to clean it up and get your credit score up over 700.
Summary of Steps to Refinance Your Car:
- Improve your credit score starting now, this can take a months
- Wait until you are 6 months into your current car loan before applying for any refinancing
- Call your current lender, ask for early "payoff amount" so you know how much to borrow
- Apply for a car loan refinance from a new lender, send in required documents
- The new lender pays off the remaining amount of your current loan, saving you years of high APR
- Now you make payments to your new lender with new terms and a lower interest rate
Before you start the car loan refinance process, we reiterate the importance of reading our full guide with more details on this topic here: Car and Auto Refinance Tips & Scams.
Good luck out with your car finance restructuring and let us know how much you saved refinancing your loan. Be sure to contact u with any questions you have.
About The Author: Jeff Ostroff
A lifelong consumer advocate with over 20 years of unparalleled expertise, Jeff is the Founder, CEO and Editor-In-Chief of CarBuyingTips.com. As chief consumer advocate, he oversees a team of experts who cover all aspects of buying and selling new and used cars including leasing and financing.
For decades, Jeff has been the recognized authority on vehicle purchasing, sought out often by the media for his decades of experience and commentary, for live call-in business radio talk shows and is cited often by the press for his expertise in savvy car shopping methods and preventing consumer scams and online fraud. Jeff has been quoted in: CNN, MSNBC, Forbes, New York Times, Consumer Reports, Wall Street Journal and many more.