Refinancing a car loan means you replace your current loan with a new one, hopefully with better terms. The benefits of auto refinancing are that you can get a lower monthly payment and a lower interest rate, which means you save money in the long run. This can be especially helpful if you had bad credit when you took out the initial loan.
Refinancing a Car Loan Can Save You Money
The biggest – and truly only – benefits to refinancing a car loan are that you can lower your monthly payment and save money each month, and get a lower interest rate to save even more for the remainder of the loan.
If you took out an auto loan when your credit wasn’t so great, you should be thinking about refinancing your vehicle. Most likely, your interest rate is higher than average, and interest charges can rack up quickly.
What Happens when You Refinance a Car Loan?
In order to refinance, you need to make sure that your credit score has improved since taking out the original car loan and that at least a year has passed. If it has, the next step is to look for a lender willing to refinance you. You can start with your current lender, but you should also rate shop to see what other lenders can offer.
Once you pick a lender, you need to decide which route you want to take, and what fits best in your situation:
- Qualify for a better interest rate – This is the best option when refinancing, because you save money in the long run. This way, both your monthly payment and your total interest charges decrease. You can improve your odds of getting a better interest rate by adding a cosigner to the loan if you’re not sure your credit score can get you the rate you’re looking for.
- Extend the loan term – If you can’t get a cosigner, your credit hasn’t improved much, or you’re struggling financially, you can refinance and extend the loan term. You end up paying more in interest charges when you do this, but it’s a quick fix if you need to make the monthly payment more affordable. Once your financial situation improves, you can always pay more each month to lower those additional interest charges.
One last thing to keep in mind: not all vehicles are eligible for refinancing. Lenders have specific requirements when it comes to the car’s age, mileage, condition, title, and equity situation.
If your vehicle doesn’t meet the lender’s refinancing requirements, you may be stuck with the loan you have. However, this is where rate shopping comes in handy, because no two lenders are alike, and you may be able to refinance with a new lender even if yours turns you down.
The Bottom Line
Refinancing an auto loan is a great way to save money. Unfortunately, you can’t refinance your car loan right after you sign up, but after at least a year passes, you can consider refinancing once you see where your credit stands.
Although we can’t assist you with refinancing, we can connect you to a dealership that has the lending resources to get people in unique credit situations into new and used auto loans.
At The Car Connection, we can help take the hassle out of the search by matching you to a local special finance dealer. Simply fill out our free and easy car loan request form, and we'll get to work for you right away!