How an Auto Loan Refinance Works
Refinancing an auto loan means you take out a new loan to pay off the balance of the existing loan. For example, if you financed a car at a dealership at a higher interest rate than what your financial institution is offering, refinancing your car loan with a new loan at your financial institution could get you a lower interest rate and lower payments.
When Refinancing Makes Sense
Refinancing your car loan can save you money, but the circumstances need to be right. Here are a few scenarios in which refinancing might be worth considering:
Interest rates have dropped. If interest rates have gone down, it’s a great reason to refinance. If you can refinance at a lower rate, your monthly payment could decrease. By reducing your monthly payment obligation, you can choose to pay extra and apply more money to the principal. This can allow you to pay off your loan faster and still save on interest.
You find lower interest rates than where you originally financed your loan. If you financed your vehicle with a dealer or bank, you might find better loan rates at a credit union and could save money compared to your current loan.
Your credit score has improved. If your credit score was on the lower side or if you needed a co-signer when you took out your initial auto loan, you may qualify for a better interest rate if your credit score is higher now.
It could help your financial situation. If your current monthly payment is straining your budget, refinancing to a lower rate and/or a longer term could make your monthly payment more manageable. It’s important to note that a longer term will stretch the length of the loan, and you will likely pay more in interest in the long run. Avoid a longer loan term that could put you “underwater,” or owing more than the car’s value (learn more below).
When Refinancing Might Not Make Sense
Before you decide to refinance, you'll want to consider not just the potential benefit, but also potential drawbacks. Here are some signs that refinancing might not be in your best interest:
You’re in the later stages of your loan. Most of the interest on a car loan is paid during the first half of the loan, so it’s typically better to refinance toward the beginning of the loan term.
Your loan has a prepayment penalty. If your current loan has a prepayment or early termination penalty, you should check if the penalty will offset the savings of refinancing to a lower rate.
Your car is older or has high mileage. If your car is older than 7 years or has more than 90,000 to 125,000 miles, some lenders may not refinance your loan.
You owe more than the car’s value. Also known as being “upside-down” or “underwater,” it means the amount left on your car loan is more than your car’s value. Lenders typically avoid refinancing in this situation – and for good reason. If your vehicle were to be totaled and you were upside-down on your auto loan, your insurance may not cover the full amount and you’d be stuck paying the difference.
Know Your Goals
If you’ve looked through the scenarios above and still aren’t sure about refinancing, you still have steps you can take. Meeting with a lending professional or using an online refinancing calculator can help you determine if refinancing your auto loan would work in your favor. It’s also important to time your refinance so you don’t miss a payment on your existing loan, which could hurt your credit score or ability to refinance. Whether your goal is a lower monthly payment or paying off your loan faster at a lower interest rate, looking at the loan details carefully can help you make a smart decision.
Explore Your Options
If you think an auto loan refinance is right for you, consider exploring the rates and terms available at DCU. We offer the same low rates and flexible terms for new or used car, truck, and van loans. View our selection and apply online.
Please note, membership is required to accept a DCU vehicle loan.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
