Auto Loan Refinancing: How it Works and How Much You Could Save

ByNadav ShemerDec. 31, 2020
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How auto refinancing works
Find out all there is to know about auto loan refinancing to see if it can save you money on your loan payments. ​

With interest rates so low, now might be a good time to consider auto loan refinancing. But before going ahead and agreeing to an auto loan refi deal, it’s worth knowing about how it works, who it’s best suited for, and how much you can potentially save.

What is Auto Loan Refinancing?

Refinancing your auto loan involves replacing your existing auto loan with a new one from a new lender, or from your existing lender, if it’s willing to offer you a refi. Your new lender agrees to pay off your old auto loan, and in exchange you make monthly payments to the new lender on your new loan. 

The application process for an auto loan refinancing is very similar to that of a new auto loan: the lender will need some personal and financial details in order to decide whether it can approve your loan and at what rate and terms.

When is it Appropriate?

An auto loan refi is worth considering in these circumstances:

  • If you think your credit has improved since you purchased your car, then you will likely be able to negotiate a better rate.
  • If you purchased your car at a time when interest rates were generally higher than they are today – and your credit hasn’t gotten any worse – again, you should be able to secure a better rate.
  • If, for whatever reason, you can’t keep up with your monthly payments, then a refinancing can give you more time to pay off your auto loan.

What are the Disadvantages?

Presuming you’re in a position to secure a better rate, then the 2 main disadvantages of applying for an auto loan refi are: 

  • The time taken to complete the application
  • Your credit score could take a temporary hit

The time factor is really not a disadvantage if you consider the savings you could eventually make from refinancing to a lower interest rate. The time spent completing the application also depends on the lender; as many lenders allow you to complete the entire process online, and some even promise to approve you instantly (within a few minutes) and to lock in your rate for up to 30 days.

As for credit score, this depends on whether the lender makes a soft query, which shouldn’t affect your credit, or a hard query, which will cause a short-term decrease in your credit score. When applying, you may want to ask your lender whether they are going to make a hard query on your credit. Having said that, the short-term reduction in your credit score should only be of concern if you are on the border between what is considered good (670-739) and very Good (740+) or fair (580-669) and good (670+), or if you are planning on applying for other loans in the short term.

Compare Top Auto Loan Refinance Options

RateGenius APR from: 1.99%
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LendingTree APR from: 2.99% View Rates
Gravity Lending APR from: 1.99%
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What are the Risks?

As long as your new auto loan gives you a lower rate than the old loan, the only real risk is not being able to meet the monthly payment. Aside from that, there are the time and credit factors mentioned above. A common mistake made by many borrowers is to apply for a loan without doing any research or preparation work beforehand. If you take the time to learn your credit score and to check out the current rates, then the rewards will come and that time will have been well spent.

How Much Can You Save?

The amount you can save with an auto loan refinance can be calculated by taking the remaining value on your loan and comparing your old APR (interest rate plus any additional fees) to your new APR. For example, if you took out a 72-month loan 3 years ago for an amount of $25,000 and an APR of 8%, you would be looking at monthly payments of $375 each month for the next 3 years in order to pay off the loan. But with a good credit score you could now secure an APR of as low as 1.99%, which translates to monthly payments of $354. Therefore, you would save $21 each month, and $756 over the remainder of the life of the loan.

Rates and Terms

Online marketplace LendingTree is a good place to see what types of rates the nation’s top lenders are offering on auto loan refinancing. 

Using the example of a loan amount of $25,000, a good credit score (680-719) and a residential address in Charlotte, NC, the following rates were found: 

Term Min.APR Monthly Payment
 84 months 2.49% $325
72 months  2.49%  $374
60 months 1.99%  $438
48 months 1.99%   $542
36 months 1.99%   $716
 24 months 1.99%      $1,063

Even when the residential address and credit score were changed and different locations such as Los Angeles and New York City were used, the rates came out fairly similar. Using an excellent score, it’s possible to secure a low 1.99% rate for a 72-month term, allowing borrowers to benefit from lower rates with low monthly payments spread out over a longer period of time.

Is an Auto Loan Refinance the Right Move?

Based on the above, it would seem an auto refinance move is the right move for you if you still need a year or more to pay off your auto loan and if – for whatever reason – your original loan had a high rate or expensive monthly payments. All of us have at one stage or another signed a loan or other contract with bad terms, but the good news – at least as far as auto loans are concerned – is that there are second chances in life, and you can get a better deal this time around.

See our in-depth reviews for more information on car loan refinancing providers.

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