When you refinance a car loan, you can often dramatically lower your interest rate and your monthly loan payments. However, a number of factors including interest rates, your credit score and the age of your car have a direct impact on your ability to get a better deal by refinancing your car loan.
Credit Score
When you take out a car loan your lender checks your credit score. Most lenders require you to have a credit score in excess of 620 to obtain any kind of loan. People with credit scores higher than 740 are viewed as low-risk borrowers and pay the lowest interest rates. If your credit score has improved since you took out your original loan, then a lender may offer you a lower rate when you refinance. However, if your credit score has fallen since you bought your car, then expect your interest rate to increase if you refinance.
Interest Rates
The interest rates on car loans are directly impacted by movements of the U.S. prime rate -- an interest rate barometer that reflects the cost of borrowing for people with good credit. If you bought your car when rates were high, you can lower your rate by refinancing. If you bought your car when interest rates were low and rates have since risen, then you cannot lower your rate even if you have good credit because interest rate rises cause the bank's costs to increase and banks pass on these costs to borrowers.
Car
Cars lose value over time and most lenders only finance cars that are less than 6 or 7 years old because beyond that point most car warranties expire and cars tend to have more mechanical problems. The older your car gets, the more it costs to borrow against because banks offer better deals on newer cars that have a greater resale value than older cars with minimal resale value. Therefore, even if you have good credit and rates are low, the age of your car may preclude you from getting a better deal.
Considerations
If interest rates are low, you have good credit and a relatively new car, a finance company may offer you what sounds like a good deal on a refinance loan. However, take the loan term into account when you refinance because lowering your payment by $50 a month may sound good, but if you add two or three years to your loan term, then you end up paying more in the long run. Additionally, on some car loans you have to pre-pay the interest, in which case you gain nothing by refinancing and actually add to your costs because you basically pay interest on the same money to two lenders.
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