Refinance Auto Loan

How to refinance a car loan

Is it possible to lower payments by refinancing a car loan?

Refinancing an auto loan can be a good way to reduce monthly payments. However, it often doesn't bring the benefits that borrowers expect. Let's take a look.

How refinancing works
A car refinance loan is no different than any other used-car loan. You determine the payoff balance on your old loan, arrange for a new loan, pay off the old loan, and begin your new loan. The new loan replaces the old.

A refinance loan does not have to come from the same loan company as the old loan.

It is possible that your auto loan company will be willing to modify the terms of your existing loan if you are in serious financial difficulty and need to lower your payments. This is unusual and should not be your only plan. Contact your bank or loan company to find out if this is possible in your case.

There are only two ways that refinancing a car loan can lower your monthly payments: 1) by lowering interest rate, and 2) by extending the payoff schedule, or both.

Will refinancing really help?
First make sure your refinancing expectations are realistic. What are your car loan payments now? How much do you want to lower your payments? Are you willing to extend your loan for a couple more years?

Refinancing can reduce your car payments if there is a difference between your old interest rate and the rate that you might get now. The benefit is greatest if your old interest rate is very high – possibly because your credit score was low at the time, or you had unknowingly accepted a bad deal.

Normal rates haven't changed much over the last few years -- not enough to significantly affect most car loans. Current rates might actually be higher than your old rate, especially if you originally got a low promotional interest rate.

Lower your interest rate
The refinance interest rate that you'll get is based on your credit score. If you don't know your credit score or are not sure if your score has improved since your loan began, you should check your score at FICO.com

If your score hasn't improved, or improved very little, you may not qualify for the lowest interest rates. You may not be able to better your original rate. Check current loan rates with up2drive.com who specializes in refinance loans.

If you have had poor credit, paying off bills and making on-time payments for a couple of years may improve your credit score a little but, depending on just how bad it was, your score may not have improved enough to make a difference in interest rates. The negative elements on your credit history stay on your report for 7-10 years and don't go away even after you improve your credit habits. Many people are disappointed to learn that good credit habits take much longer to affect their credit score than does poor credit habits.

Extend your loan term (months)
If you can't reduce your interest rate, another way you might benefit from auto loan refinancing is to extend your loan term. That is, extend the number of months that you'll have to pay off the loan. It's possible that your loan company will modify your existing loan rather than make you end one loan and begin another. This is not a great solution, but might help in a bad situation. Get a payment quote for an extended term loan at up2drive.com to see if it helps.

In most cases extending a loan term is not a good idea because it almost always means that you will be upside down on the loan for almost the entire term. You will not have any sell or trade equity until near the end of the loan. And you'll still be paying on an old car for years to come.

Let's take a look at an example of how this might work.

Example
Following is a simple example of an actual calculation in which it is assumed the buyer decides to refinance his car after one year:

New-car loan - $30,000, 6% interest, 48 months. Months remaining - 36. Payment amount - $704.55.
Balance owed after one year - $22,570.
Refinance loan - $22,570, 7% interest, 48 months. Payment amount - $540.47

This shows a monthly payment reduction of $164 but notice that we've extended the payment term out another year. Had we not extended the loan term, the payment would have been $697, a difference of only $7.

Also notice the interest rate on the used-car refinance loan is higher (because used-car rates are higher than new-car rates), which increases the payment amount. We could have extended the loan even further for an additional payment reduction.

You can do your own car loan refinance calculations with this online auto loan calculator.

Where to refinance your auto loan
Any lender or bank who grants used-car loans can refinance your old car loan. You could check with your bank or a credit union to determine if refinancing will benefit you, and get pre-qualified.

However, since it's so easy and free, we recommend going to an online company such as up2drive.com and find out instantly if you qualify. If you like their offer, simply complete the paperwork and you have a new loan. The application process is free and there is no obligation. They work with people with bad credit, no credit, bankruptcies, and repossessions — and offer good rates.

Conclusion
If you're thinking about refinancing your auto loan, make sure you do your homework and determine if it will reduce your payments enough to be worth doing. Also consider a lease-back arrangement, which might be good solution for you until your finances improve.

For more, see LeaseGuide.com