When to Refi Your Auto Loan

So, you’re eyeing your current auto loan and wondering if there’s a better deal out there. Refinancing your car loan – essentially replacing your existing loan with a new one, hopefully with better terms – can be a fantastic financial strategy. But like any financial decision, it’s not a one-size-fits-all solution. Let’s break down whether hitting the “refi” button makes sense for your situation.

First, The Lender’s Checklist: Do You Qualify?

Before you even start dreaming of lower payments, lenders have a few boxes they like to see ticked:

1. Payment History is Key: Lenders want to see a solid track record. Typically, this means at least six months of consistent, on-time payments on your current auto loan. This shows them you’re a reliable borrower.
2. Chasing a Better Rate with an Improved Score? If your main goal is to snag a significantly lower interest rate because you believe your credit score has improved since you first got the loan, patience is a virtue. You’ll likely need to demonstrate that improved creditworthiness over a longer period, often closer to 12 on-time payments, for lenders to offer their best rates reflecting that new score.
3. Your current Loan Balance ratio to the Value of the Vehicle is too high: While lenders factor in that cars depreciate, if you paid too much for the vehicle and/or didn’t make much of a down payment, your loan-to-value (LTV) ratio may exceed the lender’s requirements. For many lenders, an LTV over 150% is the maximum. To get your current LTV, obtain your current loan balance from your lender, and a good way to get the value of your car, you can see what amount carmax or carvana would buy it from you – https://www.carmax.com/sell-my-car, https://www.carvana.com/sell-my-car. Simply divide the current loan balance by the value to get your ratio – so if your loan balance is $20,000 and the value of your vehicle is $15,000, your LTV would be 133%. 

When Refinancing Might NOT Be Worth the Squeeze:

Sometimes, the potential savings just don’t outweigh the effort or potential (albeit usually small) costs.

• Already Got a Great Deal? If your current loan rate is already 10% or lower AND your loan amount is less than $50,000, the interest savings from refinancing are often minimal. The time and any potential small fees might not justify the change.
• Small Loan Balance: If your outstanding loan balance is less than $12,000, the math often doesn’t add up to significant savings. You could lower your payment by extending the loan term, but this means you’ll pay more interest over time. Only consider this if you’re in a real pinch and desperately need to reduce your monthly outlay.
• Short-Term Ownership: Planning to sell or trade in your car in the next year or two? Be cautious. Some lenders might have fees that get rolled into your new loan. If plan to trade-in the vehicle and payoff the loan too quickly, these fees will increase your new loan balance, and you’ll have less equity when you part ways with the vehicle. 
• Need More Time. If interest rates are a lot lower than when you purchased the vehicle, you could be in a good position. More often, the reduction in interest rate will be the result of your making 9-12 payments on time boosting your credit score and prompting lenders to offer you a lower interest rate. 

When Refinancing Can Shine Bright:

• High-Interest Rate Relief: This is a big one! If you’re currently saddled with an interest rate over 20% (ouch!) and you’ve made nine or more on-time payments, you’re a prime candidate. Your improved payment history could qualify you for a rate dropping into the 15% zone or even lower. This could easily translate to a payment reduction of $100 or more per month, significantly easing your budget and giving you the option to pay off the loan faster. 

What’s Your Refinancing Goal? Define Your “Why”

Before you apply, get clear on what you want to achieve. Your goal will dictate the type of refinance you seek:

1. Lower Monthly Payment without Increasing the Loan Term: This is a popular choice. You get a lower interest rate, which reduces your monthly payment while keeping the remaining number of payments the same (or very similar). You’ll save on total interest paid over the life of the loan.
2. Same Monthly Payment, Shorter Loan Term: Financially, this is often the most prudent move. You keep your payment roughly the same, but the lower interest rate means you will reduce the number of remaining payments you need to make with more of your payment going towards the principal. You’ll pay off the car faster and save the most on interest.
3. Cash-Out Refinance: Some lenders allow you to refinance for more than you owe, giving you the difference in cash. You’d likely keep your payment and loan term similar (or they might adjust slightly). Not all lenders offer this, and it means increasing your debt, so use this option very cautiously. A cash-out refi can be a good option if you are facing a large repair bill and need some cash. Also, some lenders (usually a credit union) may also offer to schedule your next payment up to 60 days from when you sign the loan agreement enabling you to skip a payment to give you more breathing room to make the necessary repair. 
4. Maximum Payment Reduction (Potentially Longer Term): If your primary need is immediate, significant relief on your monthly payment, you might combine a lower interest rate with extending the loan term. While your payment drops, be aware you might pay more interest over the life of the new, longer loan. Use this strategy judiciously.
5. Adding an Extended Warranty: Times have changed and cars are more expensive to repair with the impacts of inflation on replacement parts and newer technology in cars that costs more. Also, because of the vehicle supply crunch, you may be driving an older car with more miles with higher risk of an inconvenient repair cost. All good reasons to have a good extended warranty to avoid a large bill that will torpedo your budget and cause financial stress. The option here is with a lower interest rate, you may be able purchase a warranty and keep your payment close to where it is. Keep an eye on if the lender suggests increasing the remaining term to accomplish your goal so you a totally aware. 

The Optional Extras: GAP and Warranties – Yes or No?

When you refinance, you’ll often be offered additional products like GAP insurance or an extended warranty (vehicle service contract). There’s no universal “yes” or “no” here:

• GAP (Guaranteed Asset Protection) Insurance: This covers the “gap” between what your car is worth and what you still owe on your loan if it’s totaled or stolen. The higher your Loan-to-Value (LTV) ratio (meaning you owe a lot more than the car’s value), the more beneficial GAP insurance becomes. If your loan balance is close to your car’s value, take a pass. Also, check with your insurance provider to make sure you even need GAP insurance, some auto insurers already include the coverage in your policy. If you are offered GAP for more than $695, it’s time to negotiate a better deal and the cost may outweigh the benefit. 
• Extended Warranty/Vehicle Service Contract: If your vehicle has higher mileage or is older and no longer under the manufacturer’s warranty, mechanical breakdown coverage might offer peace of mind. The more miles on your car, the higher the likelihood of a costly repair. Pricing on extended warranties vary quite a bit depending on the amount of coverage you need, and the type of car you have. A 4X4 F150 with 120,000 miles will have a much higher price than a Honda Civic with 80,000 miles. All warranties are not the same, ask the lender to send you a copy of the policy or a brochure before sending documents to sign so you can review. Keep a close eye on how many miles or years it covers and what items are excluded.

Key Considerations for Add-Ons:

• Align with Goals: Do these products genuinely address a risk you’re concerned about and align with your financial goals?
• Shop Around: Prices and coverage for GAP and warranties can vary WILDLY. Don’t just “check the box” with the finance provider. These products have attractive profit margins for the broker or lender so you will likely be ‘advised’ to include them in your new loan.
• Don’t Feel Pressured: Take your time to understand what you’re buying.

The Bottom Line:

Auto loan refinancing can be a very smart financial move if your circumstances align. If you’ve improved your credit, found a significantly lower rate, or need to restructure your payments, it’s worth exploring. Do your homework, understand your goals, and run the numbers. A little research now could lead to significant savings down the road!