Is Refinancing a Car Worth it?
Refinancing your car can be risky, but the rewards are well worth it if your circumstances are right. Click here to learn more.
Written by Pat Roache
Reviewed by Jessica Barrett
It may be worth
refinancing a car loan
if interest rates have gone down, your financial situation has improved, or you’re having difficulty managing your current monthly payment.Managing your current auto loan can be intimidating, but it’s well worth the work. Refinancing your loan at the right time can result in a lower monthly payment, a better interest rate, and even a shorter loan period. But acting too soon risks a higher interest rate and a bunch of wasted fees.
Deciding if an auto loan refinance is right for you can be a difficult judgment to make on your own. That’s why
Jerry
, the trustworthy super app
for car insurance
and auto loan refinancing, is here to help! Read on to learn from our car experts to find out if refinancing your car is worth it.Find out if you can reduce your monthly car payments in minutes
* checking your rate won’t affect your credit score
Check your rate
* checking your rate won’t affect your credit score
When does refinancing a car loan make sense?
There are a few situations when refinancing a car may be worth it, but they all point to the same conclusion: refinancing a car loan makes sense when it saves you money.
Perhaps the local economy has shifted, or your personal finances have changed. Either way, there are a few things you can do to make sure refinancing will benefit you:
- Stay on task: Go in with a clear goal as to what you want to get out of refinancing your loan. This could be a lower monthly payment, a shorter loan term, or immediate cash relief for your wallet.
- Compare multiple offers: Just like comparingcar insurance quotes online, you should compare refinancing offers to weigh the risks and benefits. TheJerryapp can help!
- Check the numbers: Take your quotes or use an auto loan calculator to work with some real numbers. Compare your options with your current car loan agreement to make sure a car refinance will actually benefit your finances.
You can also refinance your car for more than it’s worth to receive a cash-out auto loan refinance if you need immediate funds, but it’s best to save this option for financial emergencies.
Here are a few scenarios when refinancing a car loan is more likely to be worth it.
Interest rates are lower
You may be able to refinance your remaining loan balance with a better interest rate depending on local trends.
Perhaps you took a loan at your dealership and found a better rate at your local credit union. Or the economy has shifted in your favor and interest rates are down across the country. Even a lower refinance rate of one or two points can result in significant savings over the course of your loan term.
MORE: What is a good interest rate on a car?
You’re in a better financial situation
Auto loan lenders look at your financial health to determine your auto loan rates. You’re likely to get better terms on an auto loan refinance if your credit score has improved or you’ve recently decreased your debt-to-income ratio by paying off some big debts—like a student loan.
You may also be able to shorten your loan term simply because you’ve come into some more money and can pay off your loan amount faster. Doing so will reduce the total interest on your original car loan, even if you can’t lower your interest rate.
You’re having trouble keeping up with your monthly payments
On the other hand, it may be best to extend the life of the loan if you’re having trouble with your monthly car payment. Even if you can’t get a lower rate, a longer term will help reduce your monthly payment—but it could increase your total interest.
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When is refinancing a car loan a bad idea?
An ideal auto loan refinance will result in lower interest and/or a shorter loan term with no additional fees—but that’s not always the result. Some of the negative outcomes of refinancing a car loan include the following:
- More interest: A longer loan term can mean you’re paying more interest than you would have originally, even if you’ve received a reduced interest rate. Always check the numbers to make sure auto loan refinancing is worth it.
- An upside-down loan: Lengthening your repayment period or taking a cash-out could leave you upside-down—meaning you’re paying more for your car than it’s worth. You would owe additional money on your car if you decide to sell or trade it in before the loan term ends.
Here are a few circumstances under which borrowers should not refinance their loan—even when they think doing so would offer better terms.
You’re almost finished paying off your current loan
Most loans are built so that you pay off interest earlier in the loan term. Waiting to refinance your loan leaves less interest for you to save money on.
The fees are greater than the potential benefits
Make sure to read the fine print to estimate any potential refinancing fees. For example, your original loan may include a
prepayment penalty
for paying it off with a new loan earlier than expected. You may face other refinancing fees from your lender or the state, so it’s important to make sure these don’t outweigh the actual benefits.Your car is old
Once you’ve had your “new car” for a few years, the effects of deprecation will make it harder to refinance. Some financial institutions won’t even let you refinance your car once it’s past a certain age or has a certain amount of miles on it.
You want to finance a large purchase soon
Refinancing can negatively affect your credit score, and bad credit will make it much harder to get good financing terms. You may want to hold off on auto loan refinancing if you’re planning on applying for other personal loans or credit cards in the near future.
How to refinance your auto loan without any hassles
It only takes about 10 minutes to complete the process and you can do it entirely from your phone. And did we mention that Jerry customers lower their monthly payments by an average of $118 per month?
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This app is great, but the customer service is even better! Not to mention convenient! My husband and I got the lowest rate (much lower than the rates I was finding online through my own searches), quickly, and pretty much all through text message! Thank you so much for a hassle free experience👍
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Does refinancing a car impact your credit score?
Potentially. Lenders check your credit history when you apply for a loan in what’s called a hard inquiry. A hard inquiry can reduce your credit score by a few points, especially if you have multiple inquiries on your credit report spread out over a long period of time.
How much does it cost to refinance your car loan?
There are no set costs to refinance a car loan. Your old lenders may impose certain fees like a prepayment penalty, or your new lender may require certain application fees, but these will vary.
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