Refinancing A Car Loan? Here's What You Need to Know

When you want to refinance car loan terms and payments, the process involves applying for a new car loan to pay off the existing one. Most automobile loans are secured with the vehicle serving as collateral and the borrower making fixed payments over several years.

According to the online automotive experts at Edmunds, “The most common term currently is for 72 months, with an 84-month loan not too far behind. In fact, nearly 73 percent of new car loans in the first quarter of 2022 were longer than 60 months — an increase of about 33 percentage points since 2010.”

That being said, there are a wealth of reasons why refinancing a car loan might be in your best interest. As a trusted local lender, we explore pathways to lower interest rates and the best possible terms, with our members' best interests in mind. 

Why Would it be a Good Idea to Refinance a Car Loan?

When people consider reasons to refinance a car loan, they usually have a financial incentive in mind. With money management being largely a logical process, these are common reasons that motivate people to refinance an auto loan.

• Lower Monthly Payments: If this were an episode of the television game show Family Feud, “lower monthly payments” would be the number one answer. Overwhelmingly, working families look at ways to reduce monthly expenses, and car loans are often one of the big-ticket items.
• Improve Cash Flow: Family Feud host Steve Harvey would probably be flipping the “Cash Flow” box as the number two most popular reason to refinance car loan payments. Having more cash on hand each month allows bill-payers to engage in increased leisure activity and tuck a few more dollars away in savings or their 401(k).
• Reduce Interest Rates: From a financial planning perspective, lowering interest rates should be the number one reason to refinance car loan rates. It just doesn’t deliver the immediate gratification of the first two. However, when borrowers are in a position to secure a more favorable rate, they can save quite a few dollars over the life of a car loan.

• Pay Off Debt: When growing families decide it’s time to buy a first home or upgrade to a larger one, paying off existing debt makes a significant difference. Using products that can consolidate debt and position you to buy a home may be a reason to refinance car loan debt with others. In order to secure a mortgage, you will need to demonstrate you have the means to make on-time payments. Lenders generally consider a 36-percent debt-to-income ratio ideal.

While different motivations exist to refinance car loan terms, interest rates, and monthly payments, it’s crucial to get the timing right.

The Best Time to Refinance a Car Loan

Auto loan refinancing ranks among the more important financial decisions. Although you may be motivated by a wide range of reasons, it’s essential to know when or when not to move forward. These are factors to consider when deciding the best time to refinance car loan terms.

• Interest Rates Dropped: Interest rates fluctuate over time based on market conditions and government regulations. The Federal Reserve had kept interest rates exceedingly low in the last few years, but rates started rising in 2022. Whenever they go down, it may be in your best interest to refinance car loan terms and get a more favorable rate.
• Credit Score Uptick: Your credit history and score are substantial factors when securing a car loan. If your credit has significantly improved since taking out the initial loan, it may be time to investigate getting a lower rate and improved terms. It’s important to keep in mind the Federal Trade Commission requires Equifax, Experian, and TransUnion to provide you with a free credit report. AnnualCreditReport.com offers access to your reports.
• Cash-On-Hand: Down payments are also a factor in car loans. If you were cash-strapped when taking out the existing loan, the rates, and terms might not have been optimal. When you refinance car loan terms with an increased down payment, there may be opportunities for savings.
  
  

Enjoy our money and time-saving tips for your car-buying journey by downloading our free guide:

Finding the Right Lender to Refinance Your Car Loan

Finding a lender that best serves your automobile refinancing needs does not have to be a complicated process. Many borrowers start by going online to review trending interest rates and terms. You are likely to run across plenty of slick marketing and incentives. Many people also discover hidden and excessive application and processing fees.

What borrowers can genuinely rely on is the customer service of local lenders who live and work in the community. That fact alone means you will not be treated like another anonymous borrower. Lending to fellow community members continues to be a powerful way of doing business. As the saying goes, “a rising tide lifts all boats.” As a local lender, we can review your credit, down payment, and collateral, and work diligently to secure you the best rate and terms possible.

What You'll Need to Do to Refinance Your Car Loan

Refinancing a car loan begins with some due diligence on the borrower’s part. Start by reviewing the terms of your existing car loan and determine whether there is an early repayment penalty. These can be costly, but not necessarily prohibitive.

There may also be title transfer fees. These vary by state, but keep in mind, you may need to incur the charge when paying off the car loan at some point. After you have a full grasp of your existing responsibilities and the impact of refinancing, check the current value of the vehicle.

Resources such as the Kelley Blue Book are widely accepted value estimators. If the car is "underwater" (meaning you owe more money on the vehicle than it's actually worth), you may need to put out a substantial down payment to offset the difference. That’s largely because the automobile serves as loan collateral. Gather together the following items when applying for a car loan.

• Proof of Insurance
• Proof of Residence
• Proof of Income
• Valid Driver’s License
• Current Loan Documents
  
  

The lender will also want to know the vehicle’s mileage, make, model, VIN, and year. These are generally listed on the vehicle registration. If you qualify for a car loan that serves your needs, the sum will pay off your existing car loan. That leaves you with one, hopefully, lower monthly payment and reduced financial obligation!

If you are ready to refinance your car loan, check out our Car Loans 101: Car Buying Made Easy Guide for more time and money saving tips.