How to Refinance a Car Loan and Save Big

Car loan terms are getting longer and longer as vehicles also increase in price. The average loan length is now just shy of seven years, according to Experian. During those seven years you’re paying down your car, interest rates are surely to change, as well as your financial picture.  

If circumstances or rates have changed as you’re paying your car down, you may consider refinancing your car to earn a better interest rate and payment terms. This can help you save money on interest and get closer to owning your car outright.

At WorkMoney, we’re here to help you lower the cost of car ownership, while still giving you the ride you need to get from A to B.

How Does Refinancing Work?

When you purchase a vehicle from a car dealership and don’t have the full amount, you will have to get financing. Refinancing is redoing that financing with a different lender, typically under better terms.

This works by the new lender paying off the first lender for the remaining balance of the vehicle. Now, you will owe the new lender for that balance. That new loan should have better terms than the old one. The old lender will transfer the title of the car to the new lender, as they now “own” the title as collateral until you pay it off in full.

Nothing changes with your ownership experience. You will still have a monthly payment until the loan is paid in full.

Why Would Someone Refinance a Car Loan?

There’s nothing wrong with needing a car loan. However, cars are a big reason why people have trouble saving money. The average car payment right now is $521 for used cars and $745 for new cars, according to Experian. This is a significant chunk in many people's take-home pay each month. 

What makes this debt especially hard is that money is going into an asset that loses money over time, rather than gaining. So, if you’re looking to refinance your car loan, the best case scenario is to refinance to pay off your vehicle quickly so you can move on to other financial goals.

Here are four core instances why someone would want to refinance their vehicle:

Your credit score has improved - If your credit score has improved a significant amount, you may be able to qualify for better loan terms. Keep in mind a few points won’t likely move the needle, but if you’ve recently paid off a debt or had an error removed, you may see a large jump in your score. 

Interest rates have gone down - Car loan interest rates operate similarly to home mortgages, where they go up and down as the Federal Reserve makes changes. So if rates are trending down

You can find the average loan terms for a 4, 5, and 6-year loan term here.

You want lower monthly payments - If your monthly payments are just a bit too high for your financial picture, you could potentially refinance into a longer-term loan to spread out the payments. However, a longer loan typically comes with a higher interest rate.

You want to pay off your loan faster - This is the gold mine of refinancing a car loan. If you’re able to potentially shrink the term of your loan, you will likely lower your interest rate, and pay less for your car loan over time.

Steps to Refinance a Car Loan

This can sound like an intimidating process, but it can be a quick and streamlined one. Here’s how you can get started:

Things to Watch Out For

As you’re looking for a new lender to refinance your auto loan with, be on the lookout for a few things:

Potential fees - Your current lender may charge you a prepayment penalty for paying off your loan early. This is typically 2% of your outstanding balance. In addition, the new lender could potentially charge a loan origination fee. Be sure to calculate these fees to be sure this financial move is worth it.

Vehicle requirements - Lenders won’t give loans on all vehicles. Be sure your car qualifies with a lender before applying.

How Much Can You Save?

Here are two examples of how much you can save by refinancing your auto loan. 

Example #1

Ashley bought a car with a 600 credit score. One year later, she improved her credit score to 700 and shopped around to refinance her vehicle. Her monthly payment dropped, and she saved over $3,500 in interest over the life of the loan.

Example #2

Marcus bought a vehicle in a hurry while interest rates remained high, and didn’t shop around. A year later, as interest rates began to slide downward, he decided to shop around and was able to cut his interest rate in half. He was able to save nearly $8,500 in interest over the life of the loan.

Final Thoughts

Refinancing a vehicle is a simple process. For a few hours of researching and a few phone calls, you could potentially save thousands in interest on your auto loan.

Like any financial decision, be sure to spend time researching lenders, looking at loan rates, and read the terms closely before agreeing to anything.