Traveling to work, visiting friends and family, taking that bucket-list road trip, even getting last-minute groceries—our cars are an extension of our lives, and make our dreams possible.
For many of us, this means getting an auto loan, which can have a major impact on monthly finances in the form of a high payment, increased insurance coverage needs, and more. And, what happens if the auto loan interest rate—determined by a number of factors , but typically including credit score, loan term, lender, and down payment—isn’t ideal? If that’s the case, refinancing a car loan may be an alternative.
What Is Car Refinancing?
Refinancing a car is using another loan to pay the balance on an existing auto loan. People refinance their car because they want a lower interest rate and lower monthly payments.
Refinancing a car doesn’t automatically mean lower interest rate or lower monthly payments because the rates or payments you get depend on your current financial situation. But, if you now have an improved credit score and debt ratio since you first took out your car loan (among other factors), it’s possible that refinancing could potentially save money.
When Would You Refinance Your Car?
When it comes to refinancing car loans, timing can have a big impact. Refinancing might not be for you if your financial history is perfect, hasn’t improved since your first got your car loan, or if your credit score has decreased.
For example, a credit score decrease could mean you’re only eligible for a higher interest rates than your current car loan. It could be more beneficial to wait a year to refinance when you’ve made more on-time payments on your loans and/or increased your credit score.
Also, lenders may have a minimum amount of money that they’ll refinance. And many lenders won’t refinance a car loan that has less than $5,000 remaining. So if you only have a few thousand dollars left on your loan, refinancing is probably not the best choice for you.
Pros of Refinancing a Car Loan:
Here are potential reasons why you might want to look into an auto refinance loan:
• Your credit score has improved since you took out your current loan, making it possible to qualify for a lower interest rate on a new loan.
• You’re looking to lower your monthly payments to free up some cash.
• If the interest rate you qualify for is substantially lower than your current interest rate, then extending your loan through car refinancing may mean that your new monthly payments will be lower than your current monthly payments.
Cons of Refinancing a Car Loan:
Here are some reasons why you might not want to refinance your car loan:
• Extending the length of a car loan could result in paying more in interest over the life of the loan. For example , a $10,000 auto loan with a 10% interest rate, which is paid out over five years, would cost $12,748 in total. But extending that loan to a seven-year payment period at 10% would cost $13,945—a $1,197 difference.
• Refinancing a car loan doesn’t always mean a lower interest rate; sometimes the new loan’s interest rate will be higher than the current auto loan’s.
• Most lenders won’t refinance a car loan that has less than $5,000 remaining of its principal balance.
Alternative Options to Car Refinancing
Many balance transfer credit cards don’t require interest payments for several months, making them a potential alternative.
However, this is probably only worthwhile if the remaining auto loan balance can be paid off during the interest-free time. Otherwise, choosing to use a credit card (especially if you have more than one already) could affect your credit score or tack on additional money in interest to pay off.
A personal loan can be used for everything from unexpected medical expenses to home repairs to replacing existing auto loans. If the existing car loan balance is under $5,000, a personal loan could be worthwhile. Refinancing your car loan with a personal loan can translate to lower interest rates or lower monthly payments, depending on financial history, credit score, and other factors.
Although a car refinance loan isn’t for everyone, it may be a good choice for someone looking to lower their interest rate or monthly payment. And, if it isn’t, know that there are other options that may make the ride—and auto loan—smoother.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the For details, see the FTC’s website on credit.