Refinancing your car can lower your payments, get a better rate and get you out from under the dealer
Most people know that you can refinance your mortgage for better rates, a lower payment or both. We’ve refinanced our home twice for different reasons and it was a great decision both times.
What many don’t realize is that you can refinance your car for exactly the same reasons and get the same benefits.
But my car isn’t worth nearly as much as my house, is it even worth it? Can I refinance my car if I still owe money on the loan?
The answer to both is YES!
Interest rates are still at historic lows and your payment history since you bought the car has likely increased your credit score. You could see your payments go down considerably and even get cash out with auto refinancing.
How does it work to refinance a car?
Auto refinancing works much like refinancing your home. You fill out an application with a lender including the year and model of your car. The lender will check your credit report and will estimate the current value of the car.
If you owe less that the car is worth then the lender will offer to refinance. After the paperwork is completed, you’ll get money to pay off the loan on the car and keep what’s left over. Your new loan payments will start in about a month.
Auto refinancing loans can usually be made for between two and five years and for up to $40,000 depending on your car. Since the loan is secured on your car’s title, interest rates are lower than personal loans.
When can you refinance your car?
There’s no rule for how long you have to wait to refinance your car but there are some factors to watch for when to refinance.
- You owe less than the Blue Book value of the car
- Your credit score has improved since you took out the original loan
- You need to lower your car payments to make ends meet
For most people, that means you can refinance your car in as little as six months after you buy the car.
Why should you refinance your car?
Talking about any type of refinance loan, especially refinancing a car, I always get the question, “Why not just pay it off?”
Yeah, it would be nice to pay off your loan and not have the payments. That’s out of the question for a lot of people and there are a lot of reasons to refinance even if you have less than a year to pay off your loan.
- Lower your car payments – There are a lot of opportunities to lower your monthly payment with a car refinance. Any time you lower the interest rate or extend the loan out, you’ll see your payments decrease.
- Lower your interest rate – If you’ve made on-time payments on your loan, your credit score is probably higher. That means you’ll have more loan options available and probably at the best auto loan rates. That could mean lower payments and hundreds saved on interest payments.
- Get away from Buy-Here-Pay-Here loan sharks – These used car lots prey on bad credit borrowers to charge nearly illegal rates and will repossess your car any way they can. Refinancing gets you out from under their thumb and gives you a lot more wiggle room if you need it.
- Cash out money – I would normally recommend refinancing for only the amount you owe to lower your payments but there might be circumstances where you just need the money. Refinance for more than you owe and you get to keep the extra.
Interest rates for car loans are extremely low right now. That may not be the case for long, especially with the Federal Reserve hiking rates, but will be an opportunity for a while. I’ve included a table of current interest rates but make sure you check rates and your credit score before you refinance.
How do you refinance your car?
There are a few companies that focus specifically in auto loan refinancing like MyAutoLoan but most lenders that do mortgage loans will also help you refinance your car. I like SoFi because it offers some of the best rates for mortgage, student loan refinance and car loans but the credit score requirements are higher than for other sites.
The process for refinancing your car can take less than a week but you really should give yourself a couple of months to improve your credit score if possible. Check your credit report to make sure there are no errors and try paying down any credit card debt. You should see your score increase within a month or two and will be able to get better rates on car loans.
Once you’re ready to apply for a car refinancing loan, the actual application usually takes less than five minutes. If approved, the lender will contact you to get a copy of your car’s title or the loan documents for what you still owe. Loan proceeds can be deposited in your account within a couple of days.
It’s important to understand how the new interest rate and payment compare to your old car loan. Almost any lender will offer tools to see how your new car loan compares so there aren’t any surprises after you sign.
If you can’t find a lender that specializes in car refinancing, you could always apply for an unsecured personal loan. Peer loans are available on the same terms as car loans but are not secured against your car so you don’t have to worry about repossession.
Since you can use a peer loan for anything you like, you can pay off your car loan and save the rest of the money.
Click to check your rate on a peer loan today – won’t affect your credit
Potential problems with auto refinancing
The same problems with any kind of loan come up with refinancing your car.
There are loan sharks out there that will prey on people that need money fast and will charge extremely high rates. You should check your rate with at least two or three lenders before accepting any. It doesn’t affect your credit score to apply and will help avoid some of the worst offers and help you save money.
If your credit score is so low that you’re not getting any loan offers at lower rates, try waiting a month or two to apply for a loan. Work on your credit score a little and keep up with your payments.
Avoid very long-term loans over five years. A lot of lenders have been extending car loans out to seven years lately to lower the payments but this is too long to be in debt for a car. Surveys show that most people only keep a car for between four to six years so you don’t want to be locked into the loan for too long.
Refinancing your car is about more than just lowering the payments. Lower interest rates could mean saving hundreds on interest and refinancing gets you out from under the original loan. There is no minimum length of time to refinance your car and you could potentially cash out any equity you have to use however you like. Make sure you check your credit before applying and shop around for your auto loan.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.