How Does Refinancing a Car Loan Work?

If your auto loan payments are too high for your current budget—like they are for many Americans—you could save money by refinancing.

What Is Car Loan Refinancing?

Car loan refinancing involves replacing an existing auto loan with a new one. The new loan typically has better terms, such as a lower interest rate or extended repayment period, which can lead to lower monthly payments and less overall interest costs.

Read on for tips on refinancing your car loan.

How Interest Rates and Credit Scores Make a Difference

Your interest rate affects how much your car loan payment is each month. When you refinance, you’re aiming to get a new loan with a lower interest rate than what you have for your current loan. 

So how do you get a lower rate? Your credit score is key to determining that—the higher (or better) your credit score, the lower the interest rate you’re likely to get. If your credit has improved since you first got your loan, you’re more likely to qualify for a lower rate when you refinance.

Things to Consider About Refinancing

The biggest benefits of refinancing a car loan are saving money and giving your budget some breathing room. If you can reduce your interest rate, you could save an impressive amount. Here are some things to consider before you refinance:

• Credit score impact. Applying for refinancing requires a hard inquiry on your credit report, which could temporarily lower your score. Make sure your credit is in good standing before you apply.
• Length of the loan. Refinancing for a loan with a longer term might lower your monthly payments but could increase the total interest you'll pay over the life of the loan. Consider how the new loan term affects your financial goals.
• Fees and costs. Refinancing can involve extra charges such as an application fee, title transfer fee and prepayment penalties from your current loan. Calculate these costs to find out if refinancing makes sense for you.
• Timing. Interest rates can fluctuate based on market conditions. If you want to refinance, try to aim for a time when rates are lower than your current loan rate. 

It's important to be cautious. Untrustworthy lenders could try to get you into a more costly loan. They might offer a loan with a much lower monthly payment but with a 7- or 9-year term to pay it off, which would cost you more in the long run. Be aware of extra fees as well. Always ask what fees are involved before you apply and double-check your refinancing contract before signing it.

Frequently Asked Questions

How Does Refinancing a Car Work?

Think of refinancing as applying for a new loan. It works similarly to when you originally applied. You’ll fill out an application with the same type of information you submitted for your original loan, such as proof of income along with details of your current loan (e.g., monthly payment, remaining balance) and your car (e.g., make, model, VIN, mileage). Your lender will check your credit and, if you’re approved, will tell you your options for interest rates, terms and payments. Should you accept their approval, your old loan will be paid off, and you’ll start fresh with your new payments.

When Should I Refinance My Car?

You can refinance your auto loan anytime. The sooner you refinance, the more money you’ll save. That being said, if you need to work on your credit, it makes sense to spend a few months trying to improve it. This way, you may qualify for a lower rate because of your increased credit score.

When Is It Not a Good Idea to Refinance?

Here are some scenarios where it might not make sense to refinance your current auto loan.

• If your car is worth less than you still owe on your loan. If you have negative equity, most of the time it's not a good idea to refinance.
• If the costs outweigh the savings. If you find out you'll pay more in fees and penalties than you'd save if you refinance, it might be better to stick with your current loan.
• If you've almost paid off your current loan. The benefits might not be worth the cost and effort to refinance if you don't have much time left on your current loan.

Can I Refinance a Car if I Don’t Have Great Credit?

Although it may be harder to get approved, refinancing a car loan with less-than-ideal credit isn’t impossible. Sometimes, it’s as easy as finding a creditworthy co-signer. You may also need to wait a bit while you build a higher credit score or show you have a better payment history to prove your eligibility. Asking your lender about your refinancing options will help ensure that you can get a competitive rate.

Get Started With Your Auto Refinance

If you’re considering refinancing your car loan, you could get a lower rate and lower monthly payments by refinancing with Navy Federal. It’s fast and easy to apply online, by calling us at 1-888-842-6328 or by visiting a branch.