Should You Ever Refinance a Car Loan?

Refinancing can be an appealing way to lower your auto loan costs. Putting a little extra cash in your pocket can help with your monthly budget or save for the future. However, it’s important to understand the risks that are also involved with refinancing your auto loan.

What is auto refinancing?

When you refinance your auto loan, you’re paying off the balance on your original loan and replacing it with a new loan. Oftentimes, this requires you to change lenders, since most lenders will not refinance its own loan. However, refinancing your auto loan can help you if you want to lower your monthly payments or even adjust your loan term.

Three situations when auto loan refinancing makes sense

1. Lowering your interest rate.

There are a multitude of reasons that you could be stuck with a higher interest rate on your auto loan, but at the end of the day, it could be costing you hundreds or thousands of dollars over the life of the loan.

For example, let’s say you borrow $20,000 for a vehicle with an interest rate of 6% and a 60-month term. Over the life of the loan, you would pay nearly $3,200 in interest. Now, if you took the same loan and term, but had an interest rate of 3%, you would pay a little under $1,600 in interest over those five years. While it may not seem significant when you’re taking out the loan, interest adds up as time goes on.

2. Lowering your monthly payment.

If you’re suffering from a high monthly car payment, refinancing can help you lower the month-to-month cost. The longer you’ve been paying on your original loan, the lower your principal balance is — meaning that if you were to begin a new term with that balance, the remaining funds would be spread out over a new amount of time. Your monthly payment can be lowered if your loan term is extended, if the lender offers you a lower interest rate or both.

“This is typically why we see borrowers choose to refinance,” adds Alyssa Inglis, a credit union lending officer. “Having a smaller monthly payment can help with budgeting.”

3. Removing or adding a co-borrower.

The only way to remove or add a co-borrower from a loan is to refinance under the name or names of the individuals who should be on the loan. A common reason to remove a co-borrower is if an individual could not get approved based on their own credit history, so they had a co-borrow. Now the individual has built up their credit history, however, and is confident that they could get approved on their own without having the co-borrower.

What to consider when refinancing a car loan

Refinancing a car loan can make sense in the situations described above, but that doesn’t mean there aren’t risks involved. Before you pull the trigger and jump into a brand-new loan, you should consider these potential disadvantages.

Extending the length of your car loan can lead to paying more — not less — on your loan. While lowering your monthly payment can improve your monthly cash flow, that doesn’t mean it will help you save money in the long run. By refinancing your car loan and extending the length of repayment, you can wind up paying more for your car than if you had simply stayed the course with your original loan.

Lowering your monthly payment could leave you paying more than the car is worth. If your auto refinance extends your repayment period, you might build equity at a much slower rate. Meanwhile, your car will depreciate in value. As a result, you might owe more than your car is worth, or be “upside-down” on your loan, for a longer period of time.

Watch out for prepayment penalties. The majority of car loans don’t charge a prepayment penalty, but that doesn’t mean that yours doesn’t. Make sure your existing car loan doesn’t charge a fee to pay off your loan early. If it does, you’ll need to factor the cost of that fee into your decision.

Refinancing isn’t always free. Most of the time, you can refinance your auto loan without incurring any additional fees for doing so. Still, you should always inquire about fees or charges with your chosen lender before you pull the trigger.

To benefit as much as possible from your refinance, you should opt for a new loan with a lower rate and an equivalent or shorter repayment timeline if possible. That way, you’ll get the benefit of a lower rate without paying on your car loan longer.

If you have to extend the length of your loan to qualify for some reason, you can always continue paying the same amount you paid before — with the peace of mind that you could make a smaller payment one month if money gets tight. As long as your new loan doesn’t come with prepayment penalties, you can pay it off as quickly as you want and still save money on interest along the way.

The 4 best auto loan refinancing lenders

Bank of America: Best for fast borrowing

With Bank of America, Preferred Rewards members can receive a rate discount between 0.25% and 0.50% on interest. That can make a significant difference in the amount of your monthly payment. On top of that, Bank of America charges no application fees for auto refinancing and you can lock in your rate for 30 days. The bank also advertises that most of its auto refinance loan decisions take 60 seconds, which is a benefit if you’re looking to borrow fast.

Chase: Best for national loan customers

If you’re a current Chase customer, you can enjoy a 0.25% rate discount off of your auto refinancing rate if you have a qualifying Chase checking account. In addition, Chase services the entire nation, so they’re a convenient partner. Applications can be completed online, over the phone or at a branch. This is a great option for existing personal banking members who may want all of their finances in one place.

iLending Direct: Best for comparing rates

With an A+ rating from the Better Business Bureau, iLending Direct actually partners with a network of nationwide lenders. It’s a great option for individuals who want the lowest rate possible, but they may not be able to find it. The iLending Direct experts do the legwork for you and find the best possible rate in your area. While it’s not a lender itself, it acts as your personal financial guru to save you top dollar by providing custom quotes based on your finances. It also doesn’t charge you any down payment fees.

LightStream: Best for good credit scores

Lightstream is a division of Truist Bank (formally SunTrust before the merge with BB&T) that allows you to get funded the day you apply for a refinance. It is required to be in a good credit range in order to borrow with LightStream and qualify for a low-interest rate. With LightStream, there are also no restrictions on mileage or the age of the vehicle like most lenders have. Borrowers can also enjoy a rate discount of 0.50% for setting up auto-pay for loan payments. It is important to note that the rates LightStream have on their website include the rate discount in them, so if you do not have auto-pay setup, your rate discount will be at least 0.50% higher than the advertised rates.

Lender Starting APR Min. Loan Loan Terms Rate Discount
Bank of America 3.99% $7,500 12 – 72 months 0.50%
Chase 4.44% $4,000 12 – 72 months 0.25%
iLending Direct 1.99% N/A Varies N/A
LightStream 3.49% $5,000 24 – 82 months 0.50%

The bottom line

While having a lower interest rate or monthly payment by refinancing is enticing, it is important that you consider the risks involved with refinancing as well. Carefully inspect your financial situation and your current auto loan to determine whether or not refinancing makes sense for you.

Courtney Leigh
Courtney Leigh
Writer for The Simple Dollar

Courtney Leigh has been in the financial industry for over six years, with a primary focus on personal finances. She graduated from the University at Albany - SUNY, located in Albany, NY, in 2017 with a Bachelor of Arts in Journalism and a Bachelor of Arts in Communications. Courtney's career has led her down a financial Marketing path, where she is a member of the copy team at a large credit union in Phoenix, Arizona where she currently resides with her loving pup, Emmie.