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How To Refinance Your Car And Lower Your Payment

August 02, 2018 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How To Refinance Your Car And Lower Your Payment

You love your car, whether it’s a bare-bones hatchback or a souped-up Escalade. After all, it gets you places and keeps you from having to wait outside in the cold for the bus.

But maybe you’re struggling to make the payments on your auto loan, or you’re worried your interest rate is higher than it should be. No one likes to overpay, and there are a lot of reasons why you might be paying more than you need to on your auto loan. So how do you lower your monthly car payment?

The easiest fix is to refinance your auto loan. Refinancing a car will allow you to potentially qualify for a lower interest rate on your loan. This could potentially save you money, lower your monthly payment, or both. Or, you can also look into extending your repayment over a longer period of time.

But before you get on the phone with your car dealer to ask about your auto loan, you might want to consider the different ways you can refinance. Many people assume that the only way to refinance an auto loan is to replace it with another auto loan—but that’s not actually the case. In fact, you might find that using a personal loan to refinance your auto loan is actually a better idea.

When it’s Smart to Refinance a Car

There are a lot of reasons refinancing a car could be a great idea. One common reason is that you have improved your credit score since originally taking out your auto loan, so you’re likely to qualify for a more favorable rate now.

That’s partly because if you take out an auto loan and make your payments on time, often your credit will naturally improve as long as you’re diligent when it comes to credit in other areas of your life as well.

But there are other reasons you might suddenly qualify for a better interest rate. Maybe interest rates have gone down since you originally took out your loan, or maybe a slick car salesman convinced you to get an auto loan directly from the dealership–and charged you a premium for it. You might have gotten your ride more quickly, but you’ve since realized that you’re throwing money away on your auto loan.

One final factor that could be important when considering when to refinance a car is whether you need a lower monthly payment. Life changes fast—and sometimes you don’t have as much expendable income as you once did. Refinancing allows you to lower your interest rate, but it also lets you extend the term of your auto loan so that you end up paying less monthly.

Auto Loans vs Personal Loans

When it comes to refinancing your car loan, you can either get another car loan, or you can think outside the box and get a personal loan to pay off your car. An auto loan is a secured loan in which your car is used as collateral.

That means that if you don’t make your payments, your car can potentially get repossessed. In contrast, a personal loan is an unsecured loan that you can take out for [personal, family or household purposes. There is no collateral involved. Personal loans often have broader terms, options, and rates—and they can cost you less over the course of your loan.

One important thing to note is that since auto loans are amortized loans, you pay more interest at the beginning of your loan. So the sooner you’re able to refinance your auto loan for a lower rate, the more you’ll save.

To start the refinancing process, you first need to consider how much you’re currently paying on your auto loan. Look at both your monthly payment and your interest rate. Then you need to figure out what your refinanced interest rate and monthly payment would be if you used an auto loan versus a personal loan.

If you didn’t have great credit when you took out your auto loan, you could be paying from 7% to 15% interest on your car loan. By refinancing, you might be able to qualify for a new auto loan or a personal loan, with interest rates starting around 4% or 5%.

Deciding Between the Two

Personal loans are beneficial because you can take them out for personal, family or household purposes, and you have a wide range of what the loan can cover. Also, if you have good credit and a steady income, the interest rates that you’ll qualify for on a personal loan can be very competitive.

You’ll likely be able to get better terms on your personal loan—like the option to extend your payment schedule—and there might be fewer hidden fees. SoFi, for example, offers personal loans with zero fees or hidden costs.

When it comes to refinancing your auto loan with a brand-new auto loan, one key benefit is that you could be more likely to qualify if you don’t have good credit. And you could still get a lower interest rate, because it’s a secured loan.

However, the terms on your refinanced auto loan aren’t likely to be as good. For example, if your car is too old, you might not qualify for refinancing at all. Furthermore, an auto loan is usually tied to things like the age, make, and model of the car.

If you are able to refinance, you might not qualify for a desirable term length because the depreciation on your car might not make it worthwhile as collateral. In addition, you could struggle to refinance your auto loan if you currently owe more on your car than your car is worth—either because you paid too much for your car or because your car depreciated quickly.

Interested in taking out a personal loan to refinance your auto loan? Check out SoFi personal loans today.


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 FTC’s website . on credit.

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