Rachael Brennan has been working in the insurance industry since 2006 when she began working as a licensed insurance representative for 21st Century Insurance, during which time she earned her Property and Casualty license in all 50 states. After several years she expanded her insurance expertise, earning her license in Health and AD&D insurance as well. She has worked for small health in...

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Reviewed by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

UPDATED: Apr 14, 2022

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In a Nutshell

  • Refinancing a car loan may save you money on interest rates, your monthly payments, and your car insurance
  • There are important considerations that determine when to refinance a car loan to get the biggest financial benefits
  • If you decide to refinance, make sure you check your credit score and compare loan rates and terms before applying

Paying your car loan takes a big chunk out of your finances every month. So, can you refinance a car loan to save money? You can, but you need to make sure it’s the right decision for you.

Refinancing a loan involves getting a new loan that pays off the remaining balance on your existing loan. You pay off the new amount over a set time frame.

The financial institution that refinances your car will still require you to have car insurance. When you refinance, you may want to compare car insurance rates using your new loan amount. Here is what you need to know to decide whether refinancing your car is a good option.

What are the benefits of refinancing a car loan?

People often refinance their cars to save money or get some extra cash. Applying for a new loan through a different lender may:

  • Reduce your interest rates. If auto interest rates drop or your credit score improves, refinancing your car may give you a lower interest rate.
  • Lower your monthly payments. When you take out a loan for a lesser amount, maintain the same repayment term, and get a lower interest rate, your monthly loan payment decreases.
  • Put money in your pockets. If you refinance your car for the original loan amount and you have equity in your vehicle, you receive cash for the equity.

You may also find that refinancing your loan is one way to lower your car insurance.

If you’re looking for ways to cut corners financially, but you cannot get a lower auto loan interest rate, you might also consider refinancing your loan for a longer payoff term. Over the long haul, you pay more money for your vehicle when you spread the loan out over a longer period, but your monthly payments will be lower.

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When should you refinance your car loan?

When to refinance your car loan is an important consideration. If you go through the process at the wrong time, you may not get the benefits you are looking for. There are several factors you should evaluate before you decide to refinance.

Your Current Financial Situation

If you are thinking about refinancing your car, make sure the effort is worth it. While you may be paying out less money every month, you will have a car payment for a longer time.

Your Credit Score and Debt-to-Income Ratio

Evaluate how your current credit score and debt-to-income ratio compare to when you obtained your original auto loan. If your credit score has increased and your DTI ratio has dropped, it might be a good time to refinance your car. Both factors play a significant role in what kind of interest rates you can get on the new loan.

The Auto Interest Rate Market

The interest rates on cars can fluctuate daily. Over time you may see a trend of declining rates. If the rates drop by a few percentage points, you may see a significant reduction in your monthly payments and the total amount you pay for your car.

The Equity in Your Vehicle

If you want to work with a lender that offers cash-out auto refinancing, you need to wait to refinance until you build up equity in your car. The higher the equity, the bigger the payout. However, if you don’t have much time left to pay on your current loan, it may be better to skip refinancing and reap the financial benefits of a paid-off car.

The Impact of a New Loan on Future Lines of Credit

Any time you take out a loan, it impacts your credit rating. If you plan to make a big purchase that requires a loan — such as buying another new vehicle or purchasing a house — you may not want to go through the refinancing process.

How soon can you refinance a car loan, and what is the process?

Technically, you can refinance your car immediately if you discover a lender with a better interest rate that is willing to extend you a loan. However, the minute you drive off the lot, your new car depreciates, which means the new lender would have to be willing to loan you more money than what your vehicle is worth. Ideally, you should wait at least six months before exploring refinancing options.

When you are ready to refinance, you need to take the following steps to complete the process:

  • Check on how your credit score affects your insurance rates
  • Shop around for the best interest rates and loan terms
  • Choose a lender
  • Review the loan application and gather necessary documents
  • Complete and submit the application
  • Read the loan agreement carefully and sign the contract

Once you sign the contract, the lender will pay off your current loan. You should receive documentation that the loan is paid in full. If you have a cash-out loan, make sure you know when and how you will receive your money.

You Can Refinance a Car Loan and Save Money

Refinancing your auto loan may save you money every month and over the life of your vehicle. If your financial situation has improved, interest rates have dropped, and you have equity in your car, you may want to consider refinancing.

Be sure to shop around for the best rates and terms before applying, and don’t forget to compare car insurance rates after you refinance. You should now have the information you need to determine whether refinancing is the right choice for you.