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When and why to refinance your car loan.

Did you know that you can refinance your car loan just like you can a home loan? Refinancing a car loan can be a smart financial move, allowing you to lower your interest rate, reduce monthly payments or potentially shorten the loan term. But before you make the decision, be sure to research the terms of the loan you already have as well as current rates, and take time to weigh the pros and cons. This guide is a helpful place to start.

Top three reasons to refinance your auto loan.

There are a number of great reasons people choose to refinance.

  1. It can lower your interest rate. Refinancing can be particularly attractive when interest rates in the market are lower than your current rate. If you secure a lower rate you can decrease the overall cost of your car loan, paying less for your vehicle over time than you would otherwise.

  2. You may pay off your loan more quickly. If you refinance with a lower interest rate but continue to pay the same monthly payment or even increase the payment, you can pay your car off more quickly.

  3. It may reduce your monthly payments. You may choose to refinance in order to lower your monthly payment; perhaps your cash flow situation has changed or you want to reduce your monthly expenses. If that’s the case, you can also lower your monthly payment by extending the time period of the loan. Keep in mind that extending your loan term will increase the amount of your total finance charges over the life of the loan.

What to consider before refinancing your auto loan.

  • Your current interest rate. 
    Make sure that market rates are lower than your existing loan rate, then consider any associated fees to ensure that you’re saving more than you may have to pay to refinance.

  • Your current loan balance and equity. 
    Lenders will want to know the outstanding balance on your current loan and the equity you have in your car, as these factors can impact your ability to refinance and the terms you may qualify for. (Equity is the gap between what your car is worth and what you owe on it. For example, if you have a car worth $20,000 and you only owe $10,000 on the vehicle, you have $10,000 worth of equity.)

  • Your current credit score and financial situation. 
    A higher credit score often leads to better refinancing terms, while a lower score may actually result in worse terms than you already have. A significant change in your financial situation may also impact your ability to refinance. For example, if you’ve improved your credit or FICO score since you originally financed the loan, you may be able to get better terms. If your credit or FICO score has been reduced, you may have a harder time refinancing.

When to hold off on refinancing your auto loan.

Refinancing may sound like a great way to pay off your car more quickly or affordably. But, sometimes the timing isn’t right or your current loan may have limiting characteristics.

  • Your loan may include prepayment penalties. 
    Check for any prepayment penalties on your current loan. If substantial penalties apply, the cost of refinancing may outweigh the benefits.

  • Your loan term may be too short to see any benefit. 
    If you're nearing the end of your loan term, the potential savings from refinancing might be minimal. Make sure to thoroughly evaluate whether the effort and costs involved justify the benefits.

  • You may be in an “upside-down” or negative equity loan. 
    If your car’s value is less than the outstanding loan balance, you may be in a negative equity situation. This can happen if your car has significantly depreciated in value since you purchased it; if you put zero money down when you purchased; if you paid above sticker price for add-ons; or if you are in a high interest rate loan where most of your payments went to interest instead of principal. Refinancing in such cases can be challenging and may not yield significant benefits.

How to refinance your auto loan.

    Once you’ve done your background research and determined that refinancing will help you achieve your financial goals, you can take the following steps:

  1. Shop around for lenders. Research and compare offers from various lenders to find the most favorable terms, as different financial institutions may have different rates and requirements, and be sure to check with financial institutions with whom you already have a relationship as you may be able to get a lower rate or more favorable terms.

  2. Gather the necessary paperwork. Collect all required documentation, including information about your current loan, income verification, and credit score. Having these ready streamlines the application process.

  3. Submit your application. Once you’ve chosen a lender, complete and submit the refinancing application, which you can usually do online. Be thoughtful about how many institutions you go to, as credit inquiries can temporarily impact your credit score. If you plan to apply for a loan at multiple institutions, make sure your applications (and subsequent credit inquiries) fall within a short period of time so that the credit rating agencies treat them as a single inquiry.


Auto Loan Refinance FAQs

  • Can I refinance with bad credit?
    While it may be challenging, refinancing with bad credit is possible. That being said, the terms may not be favorable and the potential savings might be limited. Make sure to thoroughly consider your options before signing anything.
  • Does refinancing affect my credit score?
    The act of applying for refinancing may result in a temporary dip in your credit score, but if you proceed with a new loan, consistent and timely payments can positively impact your credit over time.
  • When is the best time to refinance?
    The ideal time to refinance is when interest rates are lower than your current rate, your credit score has improved, or your financial situation allows for a more favorable loan term. Check out Commerce Bank’s auto loan refinance options, or get in touch with a Commerce banker to learn more or apply today.