When Is it Worth it to Refinance an Auto Loan?

Refinancing an auto loan isn't the best option for some borrowers. An auto loan refinance can provide better, more affordable loan terms, which is ideal for buyers who need to reduce their monthly expenditure. But because cars depreciate with time, there are factors to consider before applying for a refinance.

Improved Credit Score

Some people apply for an auto loan with bad credit and must therefore pay a higher interest rate on the loan. If you are paying a high interest rate, and you've recently made credit improvements to boost your low score, refinancing an auto loan can result in a lower interest rate. Auto lenders use credit scores and credit history to determine the rate on an auto loan. Factors that can increase the rate on a loan include a history of late payments and high credit card debt.

Considerations: Loan Term

Auto loans have varying terms, and some borrowers select a 60-month term to keep their payments reasonable. Because a refinance can extend the auto loan for an additional five years or 60 months, consider an auto refinance only if you plan on keeping the same vehicle for several years. If you've paid on the car loan for two or three years, rather than refinance for another five years, choose a term that's shorter to stick with the same pay-off schedule and to save money in interest payments.

Lower Payment

Refinancing an auto loan is worth it if you need to reduce your car note to keep the car. A decrease in income can impact your ability to afford your present car loan payment. Rather than sell or trade in the car, speak with your auto loan lender first to see if you can refinance and secure a lower interest rate. Refinancing for another five years can also help reduce the monthly payments on an auto loan.

Loan Balance

The amount you owe on the auto loan determines refinancing eligibility. As a standard, auto loan lenders do not approve refinancing when borrowers owe less than $7,500 on the vehicle. Call your auto loan lender in advance and ask for your pay-off balance. Because lenders vary, inquire about auto loan refinancing requirements.