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According to Experian’s latest data, the average monthly payment for a new car is up to $506! One way you could drop that monthly payment is to refinance your car loan. However, auto loan refinancing isn’t the right solution for every situation. Find out if you would benefit from refinancing your car loan.

Reasons you SHOULD refinance

1. Interest rates dropped.

The main benefit of auto loan refinancing is saving money. It all comes down to whether you can save money by refinancing or if your original loan is still the better deal. The best way to determine whether you could save money is to compare the interest rates of your current loan versus the interest rates now available on the market.

Average interest rates can vary from month to month depending on the market. You also may see lower interest rates if a financial institution is running a promotion <link to auto loan promo page> that wasn’t available when you initially took out a loan.

Here’s how much you could save if you refinanced your car loan at a lower interest rate.

Example:

You bought a new car through the dealership for $30,000 at a 7% interest rate and 60-month loan period. You’ve been making monthly payments of $594 for 12 months before you decide to refinance.

If you refinance at a 4% interest rate –

Your monthly payments will become $570.21, and you’ll save $1,143.84 over the remaining 48 months of the loan.

If you refinance at a 2.49% interest rate –

Your monthly payments will become $553.31, and you’ll save $1,955.04 over the remaining 48 months of the loan.

Saving almost $2,000 is significant! And refinancing a car is a much simpler, faster, and often cheaper than a mortgage refinance. No appraisals and often no fee required.

2. Your credit score increased.

The interest rate you qualify for is directly impacted by your credit score. Your credit score could range from 300-850, 850 being the goal.

Here’s how lenders interpret your score.

300-629: Bad credit

630-689: Fair or average credit

690-719: Good credit

720-850: Excellent credit

The higher your score, the lower auto loan interest rate you’ll qualify for. The lower the rate, the less money you’ll pay. The average American’s score is currently 695.

Your credit score can change for the better over a relatively short period of time. Perhaps opening an installment loan, like the auto loan, raised the score. Or maybe a longer history of on-time payments caused the rise. Or maybe you read our article, “Use these 7 Hacks to Repair and Raise Your Credit Score” and are now seeing the benefits.

If your credit score is higher than when you originally applied for an auto loan, it could be beneficial to refinance if you qualify for a significantly lower interest rate!

3. Your original interest rate is higher than average.

Did you buy your car with dealer financing? If so, chances are that your interest rate is higher than average. Unless you have an incredible credit score that qualified you for a 0% financing offer at the dealership, dealer interest rates are known for being higher than average. This is because they use the loans to increase their total profits. They often receive kickbacks from their lending partners for getting someone to finance their car through the dealership.

We always recommend getting pre-approved for a loan from your chosen financial institution before stepping foot on a car lot.

If you’ve compared your dealership interest rate against other interest rates on the market and found a large disparity, it will definitely be beneficial to refinance that auto loan.

Tip from the experts

There is no minimum amount of time you have to wait before you can refinance your car. Even if you’ve only made 1-2 months of payments to your original lender, you can refinance! In fact, it’s better to refinance at the beginning of a loan term than towards the end of the loan term, since most interest is paid during the first half of repayment!

Reasons you SHOULD NOT or CAN NOT refinance

1. Your vehicle loan is ‘upside down.’

Lenders will not take on a loan if it’s ‘upside down.’ This means that the value of your car is worth less than the total remaining loan balance.

You can determine your car’s value on a site like Kelley Blue Book (KBB.com)

2. You have to extend the loan period to save money.

We don’t recommend refinancing if the only way to lower your monthly payment is to extend the loan. While your monthly payment will decrease, the overall amount you pay in interest will increase.

Example:

You bought a new car through the dealership for $30,000 at a 7% interest rate and 60-month loan period. You’ve been making monthly payments of $594 for 12 months before you decide to refinance.

You don’t qualify for a lower interest rate, but the lender does agree to refinance by extending the final 48 months of repayment to 60 months. This would decrease your monthly payment by almost $100 a month. However, the total interest you pay would increase by over $1,000!

3. Your specific situation disqualifies you.

Some lenders put specific qualifications on refinances. Capital One is notorious for only refinancing cars that are less than seven years old and have remaining balances above $7,500. Check with your preferred financial institution if your vehicle and loan qualify for their refinance options!

Could you save money?

Do some quick calculations using our free auto loan calculator. You could see how much your monthly payment and interest total could drop with a refinance.

Where to refinance

You can refinance at many different financial institutions, including large banks, online lenders, and local credit unions. Do some quick research to see which option has the best interest rate and terms for your situation.

AmeriChoice is running an auto loan special during the month of October and could be a great option for your refinance. Check out our refinance promotion and see how much money you could save by refinancing at AmeriChoice!