Can You Refinance a Car?
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The Federal Reserve recently cut its benchmark interest rate by 0.50%, and this could be good news for anyone who needs an auto loan. Auto loan APRs tend to go down along with Fed rate cuts, especially for people who have higher credit scores. Lower interest rates won't help drivers save money on car insurance, but they can reduce the cost of car ownership by unlocking lower-cost car payments.
But what if you bought a car when auto loan APRs were high? Good news: If you have good enough credit and get approved by a lender, you can refinance an auto loan. Refinancing to a lower rate on an auto loan could help drivers cut their monthly car payments.
The Fed is likely to keep cutting interest rates, perhaps by another 1.50% through the end of 2025. Auto loan rates are likely to keep dropping. So based on the type of auto loan and your overall financial situation, the end of 2024 or sometime in 2025 could be a good time to refinance an auto loan.
Let's look at how auto loan refinancing works, and see when it's a good idea to refinance an auto loan.
How auto loan refinancing works
Refinancing a car works similarly to refinancing a mortgage. You need to apply for a new loan, get approved by the lender, and then pay off the original loan with the new loan.
When you refinance an auto loan, here are a few things to look for.
Lower interest rate: A good rule of thumb is to find a new APR at least 1% lower than your current loan's APR so you can save money on interest.
Lower monthly payment: You can choose an auto loan with a longer repayment timeline so you can pay less each month. But be careful -- you risk being underwater on your loan if your car depreciates faster than you pay it off. And some auto lenders might charge you a higher interest rate for a longer loan term.
Pay off your car loan faster: Refinancing to a lower rate could allow you to keep your same monthly payment amount while taking on a shorter timeline.
What happens when you refinance a car loan
Let's look at a few examples of what happens when you refinance a car loan at a lower interest rate. Let's say you currently owe $25,000 on your auto loan, with 48 months left at 8% interest. Your current monthly payment is $610, and you'll pay $4,296 in total interest over the life of the loan.
Here's how much you could save by refinancing a $25,000 car loan at 7% with a few different loan terms.
Term | |||
|---|---|---|---|
$772 | $599 | $495 | $426 |
$2,789 | $3,735 | $4,702 | $5,688 |
Data source: Author's calculations
If you want the biggest reduction in monthly payment, you could stretch out the loan to a 72-month term and pay $426 per month, which would reduce your monthly car payment by $184. Or you could choose a shorter loan term (36 months) and save about $1,500 in total interest paid -- but your monthly payment would go up by $162.
Who should refinance a car
Refinancing a car is not always the right choice, and not every car will qualify. But here are a few situations when it might be the right move.
You can get a significantly lower interest rate compared to your current auto loan (at least 1% lower).
Your credit score has improved since you bought your car and you can qualify for a lower interest rate.
Your income has increased since you bought your car and you can handle a bigger monthly payment to pay off debt faster.
You have a newer car that is in good shape and is worth more than you owe on the loan.
Bottom line
Even if the price of car insurance keeps going up, drivers can reduce their monthly costs of car ownership by refinancing auto loans. Use an auto loan calculator to see what your new monthly payment might be, and shop around for auto loan refinance rates.
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