When Auto Refinancing Makes Sense

by Dawn Handschuh, Personal Finance Writer   

If you remember your last new-car purchase, what you recall likely has more to do with the vehicle's bells and whistles than the auto loan you got.

It's understandable. Many consumers pay closer attention to the options package than the terms of the car loan offered by the dealer.

Auto refinancing at lower interest rates can save you money or free up cash, depending on your goals.

Goal: Reducing total interest paid

If you hate paying interest, a low-interest-rate environment is an ideal time to consider auto loan refinancing. You can save thousands of dollars in interest over the life of the loan without changing the loan term or monthly payments. Generally, a 2–3% interest-rate reduction will make refinancing worthwhile.

If you can afford to shorten the loan term when you refinance, you can save even more. Loan terms generally run for 36, 48, 60 or 72 months.

Goal: Reducing monthly payments

Maybe your finances have changed since you bought your car due to income loss or higher expenses. In this case, you may want to reduce monthly expenses and free up cash. Auto loan refinancing can do that because extending the loan term reduces monthly payments. (Remember, however, that this will increase your total costs.)

As with a home loan, lenders will run a credit check on you and give you a rate based on your credit history. If you know your credit has greatly improved since your vehicle purchase, leverage this to get a lower rate. Car loan rates are tied to federal fund rates, which were lowered in April to 2.00%.

If you got a car loan with bad credit and know your credit hasn't changed, refinancing doesn't make sense until you've improved your credit. This can take many months. If you don't have time, ask a family member — one with good credit — to co-sign on the loan. Make sure your existing car loan carries no pre-payment penalties.

Unlike home loans, auto refinances don't require appraisals, are quickly processed and are inexpensive. Do business with a reputable lender. Never pay an upfront fee just to apply.