Can I Refinance a Car Loan?

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If you are unhappy with the interest rate or monthly payment on your car loan, you may be wondering if you can refinance the loan. The answer is, yes. However, there are a number of factors to consider before making this leap.

Reasons to Refinance Your Car Loan

There are a number of reasons to refinance your loan, but one of the most compelling is to lower your interest rate. Perhaps your credit score was less-than-stellar when you applied for your loan, and your situation has since improved. As long as you are not extending the length of your loan by too many months, this could lower the total interest you pay on your car, which will lower the ultimate cost.

Refinancing your car loan can also lower your monthly payment. There are two ways to do this. First, if you lower your interest rate, your payments will go down as you are paying less in interest. The other is to extend the term of your loan. However, it is important to determine how much you will pay for your car in total, as extending your loan means you will often end up paying more than that initial price.

Some people have personal reasons for refinancing their car. For example, if you are going through a divorce, you may wish to remove someone from your loan. Refinancing is the best way to do this, as it gives you a new loan contract, which means your ex will no longer be responsible for the payments.

The Refinancing Process

When you refinance your car loan, you are actually using a new loan to pay off your old one. It is generally a smooth process, and the lender will not require an appraisal. However, the lender will check the Kelley Blue Book value of your car, and if you owe more on the vehicle than it is worth, which is called being “upside-down” on your loan, they will not refinance you. Some lenders will also disqualify people based on the age of the vehicle or the outstanding balance. For example, Capital One will not refinance vehicles over seven years old, loans under $7,500, or loans over $40,000.

It is a good idea to check the value of your car yourself before applying for a new loan, and also call your lender to determine the current payoff. The potential lender will do a hard pull on your credit report, which can lower your credit score in the short-term. If you are unlikely to qualify for refinancing, it is best to avoid the credit inquiry.

To Refinance or Not to Refinance?

Before deciding to refinance, there are a number of factors you need to consider. You need to know whether your new lender will charge you any transaction fees. These could be paid upfront or rolled into the loan. However, if you decide to add the transaction fee to your loan, you will need to pay interest on it, which will increase the overall cost of your car.

You will also want to shop around to make sure you are getting the best rate, and make sure any refinancing company you choose is legitimate.

In addition, you will want to consider the age of your loan before refinancing, as you pay most of the interest on your car during the first half of the term of your loan. For example, if you have a 72-month auto loan, you will pay most of the interest within the first three years. Thus, if you are in year four of your loan, it does not make much sense to refinance, as you will just be paying more interest. The younger your loan, the more money you will save by refinancing.

Primarily, you will want to determine whether this will save money in the long-run. It is important to factor in how much, in total, you will pay for your car under both your current loan and the new loan. If you will end up spending more in the long-term, refinancing is probably not a good idea, unless your financial situation has deteriorated and you are relatively desperate to lower your monthly payment.

If You Are Struggling with Monthly Payments

If you do not qualify for refinancing, and are struggling to make payments, know you still have options. Contact your lender, and they may be able to adjust your payments by lowering your interest rate or extending your loan. It is imperative you contact them before you fall behind on payments, though. Failing to make on-time payments will negatively impact your credit score, which will make it harder for you to get a low interest rate on a car loan or qualify for other loans, such as credit cards and mortgages.

About Lynn Oldshue

Lynn Oldshue has written personal finance stories for for twelve years. She majored in public relations at Mississippi State University.
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