• Refinance your car loan, lower your monthly payments in a few easy steps
  • Find great rates instantly using MoneyAisle's patented new auto loans tool

When Does Refinancing Make Sense?

Do you feel that too much of your paycheck goes straight to your vehicle? Refinancing your auto loan could put more money in your pocket. If you have ever wondered about refinancing, this guide is here to help explain how it works and when it makes sense for you to do it.

How it works

An auto refinance loan uses a new loan to pay off an existing loan. When you refinance, your current loan and vehicle title are transferred to the new lender, who pays off your existing loan. You would then begin to make your monthly payments to the new bank or lender.

How refinancing saves you money

Typically when you refinance, your new loan will have a better interest rate, lower monthly payments, or other conditions that are more favorable to you. If you refinance and receive a lower interest rate, your monthly payments will be reduced because you won't be paying as much in interest, thus putting more money in your pocket each month.

When does refinancing make sense?

Refinancing can make sense for a number of reasons. If anything has changed with your financial situation since you originally took out the loan, you should consider refinancing. One example of this would be if your credit score improves, you can refinance to get a more favorable interest rate based on your new improved credit.

Other examples of when to refinance your auto loan:

Do you owe more than the vehicle is worth?

Also known as an upside-down loan, owing more money than the vehicle is worth exists when the loan balance exceeds the vehicle's current value. When this happens, negative equity occurs and the buyer has no ownership equity in the vehicle but instead has a negative balance.

To avoid getting stuck with an upside-down loan:

  • Make at least a 20% down payment
  • Choose a shorter loan term (48 months or less)
  • Avoid vehicle make or models that rapidly depreciate in value

Did you obtain your loan from the dealership?

If you obtained your car loan from the dealership where you purchased your vehicle, you may not have gotten the best rate. Dealerships often quickly and conveniently set up your loan for you, but that doesn't give you enough time to carefully research rates.

If you obtained your loan directly from the dealership, research rates available from multiple banks and credit unions. Our auto loan rate search tool will help you compare multiple rates at once, so you can at least check to see if you are getting the best deal.

Is your monthly payment too high?

Do you find that month after month, you have trouble affording your auto loan payments plus other financial obligations? If your monthly payments are simply too high, you should consider refinancing. You can lower your monthly payment requirements by choosing a longer loan term. However, choosing this option will cause you to pay more in the long run because you will be paying interest for a longer period of time.