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What Does Refinancing Your Car Mean? Pros and Cons

Man driving with his beagle dog

It simply means replacing an existing loan with a new one.

You’ve probably heard of refinancing. It’s commonly more known in relation to a home purchase or mortgage, but it’s possible to refinance your automobile loan, as well. It’s important to understand what taking this step means and how the repercussions could affect other areas of your financial life in the long run.

For some, it’s a good idea. For others, it might not be the best choice.

Having the best car payment means being able to afford other necessities, such as your car insurance.

What is an Auto Loan?

Most people get financial help when they purchase a big ticket item, such as a home or a new car. For an auto, a repayment term (or length of your loan) is usually 36, 60, 72 or 84 months. The good news is you can shop around to find different terms that provide benefits for you.

Traditional methods include financing through the dealership or direct lending through a financial institution, such as a bank or credit union. And it’s now possible to cast your query to a pool of online lenders to get the best financial offers, in terms of interest rate and more.

The Federal Reserve sets a standard interest rate that most private lenders follow, so your financial decisions could be served by keeping an eye on “the Fed” and what they are doing. When they lower interest rates, it could be a great time to buy.

Dealership Financing

As with most things, there are pros and cons to this type of situation. Even though a bank will most likely service it, the contract is with the dealer. Car shoppers can sometimes find stellar deals when auto manufacturers offer very low interest rates to spur sales. However, if this is not the case, you may not have the same freedom to determine your rate as you would when shopping around with a lender.

Lending Institution

Those who walk into a dealership with a pre-approval typically have not only found a lender that will give them the rate they want, they have the ability to walk away from a dealership that isn’t giving them the best deal. Dealers understand this, so you may get more favorable terms (plus upgrades thrown in) when you use direct lending for your current car loan.

Whether you are getting a new loan or refinancing an old one, you’ll still have to provide important things such as personal information, including proof of income, and go through a credit check. If you have poor credit, you may not be able to get a palatable interest rate from anyone. Your annual percentage rate (APR) may seem higher than your interest rate, because the APR includes fees associated with purchasing an auto, such as document, title and registration, destination and insurance.

When is the Best Time to Consider Refinancing Your Vehicle?

For the most part, people refinance in order to get better deal on their terms. So, it’s important to wait until your credit report has had time to rebound after you purchased your current vehicle – and hopefully, had time to increase by a few points.

Refinancing has many pros, like lowering your monthly rates, shortening the time left on your loan to pay or the opportunity to pay less interest overall. If your credit report is healthy, your financial institution or company may offer you a lower interest rate that will help you pay off your debt faster.

Happy African American family with car and house in background

Should I Consider Refinancing?

Refinancing your vehicle is a big decision and there are several factors to consider in order to determine if it’s right for you. You may just want to get out of your original loan and that could be a good move, depending on the reasons. Interest rates could have dropped or your credit score could have improved significantly, which could give you better terms, help you pay off debt faster and save you money.

You can take advantage of this free auto loan refinance calculator to see how taking this action may affect your monthly payment, as well as the bottom line of your loan. Using financial calculators makes the most sense when trying to determine is this is the right time for a move.

Let’s take a look to determine if refinancing your car is in your favor:

  • Interest rates have fallen – At the time of your purchase, you may have not received an ideal interest rate from your lender. If interest is now lower, refinancing your car could secure you a better rate, reduce the amount of interest you pay on the remaining time and help you pay off your current loan debt faster.
  • Your credit score has improved – As with any money borrowing, a major factor of your interest rate will be based on your credit score. If you initially had credit problems or no history and now your score has improved, you may qualify for a lower rate through a refinance with your current lender or a new lender. That is why it is important to always check and stay current on your credit score.
  • Your financial situation has improved – If your paycheck has increased or you’ve combined your income with a spouse, it could help improve your odds of landing a more favorable interest rate and decreasing the time frame necessary for repayment.
  • Reduce your monthly car payment – You may prefer to have a lower monthly payment and are not as concerned about the duration. In that case, refinancing your car to reduce your payments could be an option. Although your term could be increased, your monthly rates can become more manageable for your budget.
  • Money for other uses – If you are encountering financial issues and need to decrease your monthly payments or simply want to be able to save for unexpected events, refinancing your car may be the solution for some extra cash. By extending the duration, you can help to lower your monthly payments and put some extra money in your pocket. Some people, for example, have done this to pay off student loans.

Refinancing your auto loan can be a great option in some circumstances and give you the ability to have more control of your finances, but you need to assess your situation carefully. You first need to completely understand your original terms, read the fine print carefully, and then make sure you research, plan and shop around with various lenders before refinancing your car. If you choose to switch lenders, make sure your original one does not have a prepayment penalty.

Will This be Like Starting My Loan Over?

In a sense, yes. You will be starting over with a new one. In most cases, the terms will be more favorable. However, if you are taking this step because you need extra money or dollars in your pocket, a longer term and/or lower monthly payments, your new loan may increase the total cost of your debt. It’s a financial decision that will impact your unique situation.

What are the Pros and Cons of Refinancing My Vehicle?

The process of refinancing comes with pros and cons and it’s important that you understand all of the available information to make the right choice. Common reasons for refinancing include financial needs and getting a shorter term on the life of the loan. Let’s take a deeper look at some of the pros and cons of changing your financial situation in this manner.


  • You may get a lower interest rate.
  • You may be able to get cash for something else, for example, a medical expense.
  • You may be able to consolidate debt.
  • You may be able to get more manageable monthly payments that lead to potential savings.
  • You can change to a new lender if you are unhappy with your current lender.


  • Refinancing comes with attached fees, such as closing costs. Look for a lender that doesn’t charge extra fees, such as a credit union.
  • If you extend your duration, you’ll pay more interest – increasing your total debt.
  • Your vehicle is the collateral. If you default, your lender may force a sale of your car to pay your debt.

What is the Process to Refinance a Car?

The process of refinancing is basically the same application process you went through when you took out your first – or any – loan. You’ll want to gather the relevant information and documents to submit to your finance company. This includes:

  • Checking your credit history and credit score. Remember to keep all payments up to date for a good score that will get you a lower interest rate. Credit cards are a good way to build credit, but you must walk a fine line between too many credit cards and too few.
  • Assess your monthly income. Your monthly income – as well as what you earn in a year – will play a part in how much money you can reasonably expect.

Be sure and provide accurate and truthful information to your finance company. Just as with a mortgage, you will be awarded this money based on your answers to their questions.

How to Get the Best Deal

Those who are considering financing or refinancing a major purchase, such as an automobile, can take certain steps to help get a better deal. These include:

  • Improve your credit score – the higher the credit score, the lower the interest rate. Understanding your current credit score and making the appropriate changes to increase it will go a long way. Scores above the mid-600s are the best.
  • Find a lender – Let them compete for your business so you can get favorable terms. Enter the dealership with preapproved loan rate terms. This encourages them to entice you with other benefits, including upgrades, a lower total price, higher trade-in value and more.
  • Choose wisely – If a dealer offers you cash off the sales price or a lower interest rate, which would you choose? Make sure you understand that some cash in your pocket may not be the best deal over the life of your loan when a low interest rate could save you more.

Once you’ve gotten a great deal, you can potentially lower your payment even more by signing up for auto-pay, which can earn you a discount.

Get Affordable Auto Insurance Online Today

One thing is for sure. You’ll need cheap car insurance whether you decide to refi your car or not. At Freeway, we offer affordable coverage that suits your needs. We are happy to help. Get a fast and free insurance quote online, give us a call at (800) 777-5620 or stop by one of our convenient locations.

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