When Is Refinancing Your Auto Loan Worth The Headache?
Is it a good idea to refinance your car loan? We can give you the short answer right up front: probably not. If you’re looking to make lower payments, that’s going to result in paying more interest in the long term, and refinancing should be a last resort. But, there are circumstances where refinancing is not only reasonable, it’s smart. That is especially important nowadays if you, like most people, are buying more expensive cars than ever. In 2024, the average new-vehicle transaction price hovered around $48,400 – more than a brand-new Honda Civic Type R.
Refinancing might be the best option in some cases, but that doesn’t make it any less of a headache. So, the question isn’t just whether refinancing would benefit you, but whether it would benefit you enough to be worth going through the application process all over again to knock a few bucks off your monthly payments. Here’s our take on the matter.
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Any advice provided based on data sourced from various financial institutions is based on analysis of said data by the experts at CarBuzz.
How Do You Refinance An Auto Loan In The First Place?
To cover the basic steps to refinancing, in brief, it breaks down like this:
1. Get Your Information Straight
A few things you’ll want to know before you get started in the process:
- Your credit score
- Your car’s current value
- What you have left to pay on your own
If you haven’t gotten a credit check or taken a look at your car’s value lately, now’s the time.
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2. Gather Your Documents
Whenever you’re heading to a bank, lender, or credit union, is to gather up your documents. For refinancing an auto loan, that’s going to include the following:
- A recent credit report
- Driver’s license
- Proof of insurance
- Proof of income (pay stubs, bank statements, etc.)
- Social security number
- A copy of your original loan contract (the lender will have a copy if you can’t find it)
Additionally, it’s a good idea to have these numbers written down somewhere:
- The remaining balance on your loan
- Your monthly payment
- How many payments you have left on your loan
- Your car’s VIN
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3. Compare Lenders
You’ll probably want to start with your bank or credit union. Get that offer, and take it around to see if any lenders can beat it. It’s a good idea to get at least three pre-approvals before making a decision. Remember that your current lender may be able to offer you a new deal, too, but it helps to have several options to choose from.
Once you’ve made your decision, all that’s left is to sign on the dotted line. Bear in mind that you can refinance more than once, so whatever you sign won’t be set in stone. If you’re waiting on that promotion, or you’re one year away from paying off your mortgage, you’ll be able to refinance again when your situation changes, so don’t stress over your decision too much.
When Is Refinancing A Car Loan Worth The Hassle?
What we’ve laid out above is a broad outline of what it takes to refinance. In practice, this means calling, emailing, and messaging dozens of lenders to find three or four that are worth your time. It means digging into stacks of paperwork to find receipts and statements and pay stubs to bring into the bank with you. Even the most painless refinancing experience is at least going to take a couple afternoons out of your week to get it done. So, when is it worth it?
Your Credit Has Dramatically Improved Since You First Took Out Your Car Loan
Maybe three years ago your back was against the wall. You needed a car to get to work, and you had to take whatever deal you could get. Now, perhaps you’ve paid off a bunch of credit card debt, you’ve been making every car payment on time, and your credit rating is in much better shape today than it was when the new car smell was still fresh.
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This is a scenario where refinancing can result in lower payments and lower interest, which could add up to thousands of dollars in savings by the time your loan is paid off. This is the best case scenario, and, in this instance, you’d be crazy not to refinance.
You Need To Free Up Some Money
Sitting down and rethinking your finances isn’t always a bad thing. If you’re getting approved for a mortgage, for instance, your lender might want to see a little more money coming in, or a little less money going out, before they’re comfortable setting you up with a loan. The process of refinancing your loan may ding your credit score by a few points, so it’s a double-edged sword, but in some situations, it may be more than worth the trade-off. This is a fine reason to refinance a loan, but it’s worth considering what else you can cut before you head into your bank to talk turkey. Financial website Finder.com ran a survey a few years back determining that Americans spent $397 million on unused gym memberships in 2020 alone.
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Meanwhile, Variety reported in 2024 that Americans typically spent around $61 per month across an average of four video-streaming services. And how many of those are they really watching frequently enough to justify the expense? We’re not telling you to go without the necessities, but it might be time to do a little financial pruning. You could be sitting on a couple hundred bucks a month that you could claim just by canceling memberships and services you don’t use anymore.
You Can Afford Bigger Payments
One of the smartest reasons to refinance: you can afford to pay more per month, now, meaning you’re paying less in the long run. You got a raise, or you finally paid off your college loans, or your side business is taking off. As long as your improved financial standing is somewhat stable, it’s almost always worth the effort to refinance your auto loan.
Interest Rates Are Down
Sure, this is a good reason to refinance, but it’s not likely to happen anytime soon. There are still some good deals to be found, but cars are becoming less affordable, and interest rates are part of the problem. The third quarter of 2024 saw average interest rates settling at around 6.61%, according to Bankrate. In 2022, the average interest rate was 4.61%. Right now, the trend seems to be for loans to get more expensive, not less expensive. If rates do start to drop, it will likely be a very slow process, and it could be a couple years before it’s a big enough difference to be worth refinancing.
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This is to say if you took your loan out a few years ago, be happy you got in while the getting was (relatively) good. If you took your loan out more recently, you might be able to reap lower interest rates sometime in the future, but don’t hold your breath.
What If You Can’t Refinance Your Car Loan?
You might not be able to refinance your car loan in the first place for one of a few different reasons:
- You’re “upside-down” on your loan (you owe more than the car is worth)
- Some lenders won’t cover you if your car is too old or its mileage is too high
- Your current loan is too new or you haven’t paid enough of it off yet
- You’ve made a few late payments
Different lenders may have different reasons for refusing to cover you, so you could always add “who knows?” to the list. Whatever the case may be, refinancing might not be an option. If you simply can’t make your payments, there are a few things you can do. If the situation isn’t serious enough that you need to sell your car and buy something cheaper, or defer payments, our advice is to simply wait it out. Work on your credit, make your payments, and see what your options look like six months, a year from now, and keep your chin up.
Sources: Variety, Finder, Bankrate.
