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What You Need to Know About Refinancing Your Car Loan

Written by Camille Puschautz on November 24, 2014 in Credit  |   2 comments

Auto loan originations, or applications for new loans, hit an all-time high in 2014, as Americans flocked to lenders for loans to purchase new and used cars. According to Equifax data, the total number of new loans has increased almost 5 percent from June 2013….

what-you-need-to-know-about-refinancing-your-car-loanAuto loan originations, or applications for new loans, hit an all-time high in 2014, as Americans flocked to lenders for loans to purchase new and used cars. According to Equifax data, the total number of new loans has increased almost 5 percent from June 2013.

“The abundance of high-quality vehicles for sale, the attractive financing options available, and the ever-increasing age of cars on the road today have created an environment that makes it easy for consumers to say ‘yes’ when it comes to purchasing a new or used car,” says Amy Crews Cutts, senior vice president and chief economist at Equifax. Auto loan balances have also increased, rising to an all-time high of $924.2 billion in August.

While financing a car can be a great option, a large auto loan balance can impact your day-to-day finances. If you’re already on a tight budget, a large balance can make it tough for you to meet your financial goals. As a result, you may be considering refinancing your car loan.

Here’s what you need to know about refinancing your car loan.

Refinancing your auto loan may allow you to get a better deal.

By refinancing, you may end up paying less than the amount to which you originally agreed, either because your original loan terms were high or your financial profile has shifted since you got the car. In either case, most lenders will want to look at the make, model, and mileage of your car to calculate a new loan agreement. Typically, you do not need to have a car appraisal or any special type of loan to refinance, says Karl Brauer, a senior analyst with Kelley Blue Book.

“There shouldn’t be any restrictions on who can refinance ; you’re just trying to see if you can get a better deal on your current car loan,” Brauer says. You can refinance new and used cars, but used cars typically have a higher interest rate because they imply more risk to the lenders, he says.

Understand the total cost of your auto loan.

You may want to review the total cost of your current loan, including the interest rate, the length of the repayment period, and any other fees. Use your total loan cost to evaluate new loans, and take into account every aspect of the potential loan, not just the monthly payment or interest rate.

For example, some loans also carry a prepayment penalty fee that you’ll have to pay if you’re repaying the loan early. When you refinance, the new lender will pay off your old loan, but you may have to cover that prepayment penalty fee. Be sure that your comparison costs factor in fees like this.

A lower interest rate doesn’t necessarily mean a better deal. For example, let’s say your car loan amount is $15,000 with a 5 percent interest rate over a term of four years. Your monthly payment will be $345.44, and you’ll pay a total of $1,581 in interest when the term is complete.

If you refinance the same loan amount to a 3.5 percent interest rate over a term of seven years, your monthly payment will be reduced to $201.60. However, you’ll end up paying a total of $1,934.21 in interest, meaning that the lower interest rate combined with the lower monthly payment will cost you $353.27 in interest over the life of the loan.

Your credit history may impact your ability to refinance.

While anyone may be able to refinance, your credit score is another important factor that impacts your loan terms. People with a solid credit history and credit score may be able to get an interest rate that is lower than 5 percent.

“Somewhere between 0 percent and 4 percent would be my goal for a new car,” Brauer says. If your credit score has increased since you first got the loan, due to debts paid-as-agreed or a lower mortgage principal, for example, you may now qualify for a lower interest rate due to your improved financial profile.

On the other hand, if you’ve suffered a financial setback or you have a lower credit score than you did when you initially took out the loan, you may want to refinance to a lower monthly payment. The lender will usually work with you, Brauer says, because it’s better for you and the lender to get a lower rate rather than having you default on your payments. While the total cost of the loan may increase, “it’s better than having a repossession on your credit [file],” Brauer adds.

Interest rates also can vary depending on the supply and demand of credit. If demand for car loans increases, interest rates will typically increase. If the demand weakens, interest rates will drop.

Tips to refinance your auto loan

If you are ready to refinance, make sure you review the terms and conditions on your current loan before you start shopping around to see what other loans are out there. Compare your current loan with the total cost of potential new loans, and be sure to include any prepayment penalty fees or hidden costs. You may want to let your current lender know that you are considering a refinance—your lender may come back with a competing offer in order to keep your business.

Finally, if you are a member of a credit union, you may want to have a representative from the lending department look over your loans and explain any elements that you don’t understand.

When you’re refinancing your loan, don’t be afraid to go after the best deal, even if it means switching to a different lender. Take the opportunity to save yourself time and money whenever possible.

Camille Puschautz is a researcher, writer, and Web producer at Think Glink Media, with a background in print and digital media. Previously, Camille worked for Bloomberg News in New York and MediaTec Publishing in Chicago. She is a graduate of the University of Dallas and Northwestern University, where she received a master’s degree in journalism.

The information contained in this blog post is designed to generally educate and inform visitors to the Equifax Finance Blog. The blog posts do not give, and should not be assumed to provide, personalized tax, investment, real estate, legal, retirement, credit, personal financial, or other professional advice. Before making any financial decision, you should always consult with the appropriate professionals who can explain your options, rights, and legal responsibilities, and advise you on any tax, legal, credit, or business implications that may result from those decisions. The views and opinions expressed by the authors of blog posts are their own views and may not be the views or opinions of Equifax, Inc. and/or its affiliates.


  1. Janette says:

    This is best advice I every had in years.. I have learn so much just by having equifax and I vovle the opportunity to continue to learn and to be a better customer.the car I just bought is 2011 2door 4seat Benz instrest rate 2.99%

  2. Anonymous says:


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