Shortly after we married, my husband and I decided to buy a car — the first either of us bought without our parents co-signing. We didn’t know what we were doing, and ended up with dealer financing for six years and an interest rate that I later discovered verged on subprime.
Two years later, after learning a little more about money and credit, we decided to refinance the car. As a result, we saved hundreds of dollars in interest and improved our cash flow through a lower monthly payment.
Refinancing your car can come with a great benefit — if you do it right. Here are some do’s and don’ts to remember when you refinance a car:
Do refinance your car if you can get a lower interest rate
I refinanced my car with a regional bank that happened to be running a special deal. Rather than having an 8.90% interest rate, we were able to drop it to 2.90% and refinance for five years. That’s a pretty big difference, and you can see what we saved, thanks to this calculator from RoadLoans.com.
To get that lower interest rate, you need to be aware of some of the factors involved.
First of all, we didn’t shop around for interest rates before buying the car, and the financing manager at the dealership just offered us a loan with the highest rate he thought he could get away with. Compare offers to see what you can get for interest, whether you are getting a car loan for the first time or are refinancing.
Next, check to see if your credit score is higher than when you first bought your car. Our credit scores had improved since buying the car initially, so we were eligible for the bank’s lowest promotional rate.
Finally, if market conditions have changed so that interest rates are lower, it might be a good time to look around. If the Federal Reserve continues along its current path, rates may soon be higher. In some cases, it might make sense to refinance a car now, before the Fed raises rates further.
Do refinance if you can get a lower monthly payment
Looking to improve your monthly cash flow? According to Christopher Wysong, certified financial planner with Ameriprise Financial, it can make sense to refinance your car loan.
“The goal should be to lower your payments and save you interest,” he said. “If you’re moving from a 60-month loan to a new 60-month loan, your payments will be less since you have paid off principal.”
Gaining a little extra breathing room in your monthly budget can make a big difference. At the time I refinanced my car loan, an extra $33 in my budget each month meant I could pay down credit card debt a little bit faster or afford a co-pay when I took my son to see the doctor.
Plus, you’ll save money on overall interest payments because of the lower interest rate — and the fact that your loan is smaller, since you’ve paid some of it off before refinancing.
Don’t refinance to a longer term if your car is temporary
Refinancing to a longer term can be tempting, especially if you want to ease cash flow. However, Wysong warned that this can be a trap if you know you won’t keep your car much longer.
“You can find yourself upside down, owing more on the car than it’s worth,” he said. This is especially true if your original loan’s term stretched beyond five years.
With my car refinance, I ended up adding a year to the overall loan term. I had four years remaining on the original loan when I refinanced to a five-year term. However, the savings were dramatic, and I knew I would keep the car for a few years after that. In fact, I drove the car for three years beyond the refinanced pay-off date.
Wysong said it doesn’t make sense for a car refinance to be for a term longer than 60 months, no matter your intentions for the vehicle.
“The car loses value significantly faster than you are able to pay off the loan,” he said. “If you try to sell or trade-in the car before the loan is fully paid off, you might have to bring money to the table to get the deal done.”
Do refinance if you can afford to pay off the car faster
What if you just want to save money on interest and pay off the car faster? When that’s the case, you might not care about the cash flow. If you can afford the higher payment, and your goal is a faster payoff and lower overall costs, refinancing to a shorter term can be the answer, said Wysong.
Using my situation, what if I had decided to pay off the loan with a three-year car refinance?
As you can see, it would have meant an extra $91.48 per month. But I would have had even bigger interest savings overall and gotten rid of my car debt much sooner.
However, once you lock in that higher monthly payment, you lose some flexibility, Wysong pointed out. If something happens and you can’t afford the higher payment, you face consequences such as a lower credit score and potential car repossession.
It’s important to consider your goals when you refinance a car, so that you make your move according to desired outcomes.
Don’t refinance if there are fees involved
Not only is Wysong a financial planner, but he also has 10 years of experience working for banks, and he knows how car loans work.
“Fees are easily overlooked, and banks disclose them as discreetly as possible,” he said. “The fees alone can eat up two or three months of payments.”
Wysong said to watch out for fees related to an early payoff, and to look for loan origination fees on the refinance loan. When looking at your car refinance deal, carefully read the fine print. Run the numbers to see if your interest savings match the fees charged by the lender. In some cases, you might not actually break even if there are significant fees.
Don’t forget to make your payments on time
Finally, as you go through the process of refinancing, you want to make sure you don’t miss a payment with your original lender. Keep making payments until you receive a notice that the loan is paid off. If you end up over-paying, the lender will refund your payment. It’s better safe than sorry.
Should you refinance your car?
In the end, whether or not it makes sense to refinance your car depends on your goals and the deal you can get. If a car refinance will help you reach your short-term and long-term financial objectives — and you can get a lower interest rate and save money — it can be a good decision.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|