Complete Guide to Refinancing Your Auto Loan

First Service Credit Union
8/1/2018 12:00:00 AM - 3 min. read

Millions of Americans depend on a personal vehicle to get back and forth from work, school, or just to get around town. Despite being the means of transportation for many, owning a car can be expensive. In fact, over 40% of Americans are paying on auto loans to finance their vehicles, and many of them are overpaying.

If you are stuck with a bad loan for a good car, refinancing can be a great move. Think of it like hitting a magical restart button on the whole financing process. From reducing high-interest rates to cutting down monthly payments, refinancing your car can help you free up cash. If you’re feeling uncertain about your current auto loan, here is what you need to know about refinancing.


What Is Auto Refinancing?

Refinancing your auto loan is when you take out a new auto loan to pay off your existing one. This may afford you the opportunity to get a better interest rate, set new terms, or even move your loan to a better lender.

As an example, let’s say you financed a new car through a dealership one year ago. Your original loan had a 60-month term with a rate of 6.5%. Your original monthly payment was $500, so over the course of this year you’ve made $6,000 in car payments. Now let’s say you refinance your loan for a more competitive rate and a 48-month term. Your new monthly payment is now only $425, and you will still be able to pay off your car in the same amount of time. That means that refinancing will save you $3,600 over the life of your auto loan.

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Pro-Tip: The best way to avoid getting locked into a high rate at the dealership is to get pre-approved for your auto loan before you ever start shopping.


5 Reasons to Refinance Your Auto Loan

There are several potential benefits to refinancing. Even if your financial circumstances have not changed since you began paying on your current auto loan, you may still be able to take advantage of the following benefits:

1. Get a Better Interest Rate

Your car loan's interest rate is determined by several factors, such as your credit score, debt-to-income ratio, and the cost of the car you plan to purchase. Lenders use a number of different indicators to decide what rate to charge individual borrowers, and these can change frequently.

2. Lower Your Monthly Payments

Lowering your interest rate is just one way that refinancing can reduce your monthly payment. It gives you the option to select different terms, which could extend your deadline to repay your loan. This can significantly reduce your monthly payment, but it may also mean extending your payoff date.

3. Change the Borrower(s) on Your Loan

There are many reasons to include multiple people on a car loan. Many first-time car buyers, for example, may need a co-borrower to secure financing. Refinancing allows you to change who is named on your loan.

4. Borrow from a Different Lender

Every financial institution is different. Different lenders sometimes mean different offers, benefits, and ways to make loan payments. Being unhappy with your auto lender doesn’t mean you are stuck with them. Many borrowers refinance just to switch lenders so they can do business with their preferred financial institution.

5. Take Cash Out of Your Car

If you have equity in your car, meaning you owe less money than the amount at which your car is valued, then you may be able to take cash out when you refinance. The exact amount will depend on your current equity and the loan's terms. As you might imagine, this is not an incredibly common scenario because of the way cars depreciate, or lose their value. However, there are instances where a person can pay extra early on in their loan, which may allow them to take advantage of a cash-out refinance.

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Pro-Tip: Refinancing may also mean not having a payment due for a while. When you refinance with First Service, for example, your first payment won't be due for up to 90 days.94


Weighing the Pros and Cons of Auto Refinancing

As with any loan, there are instances where auto refinancing may not align with a person’s financial goals. Under the right circumstance, it can be a great option, but you should always consider the pros and cons carefully before making any financial decision. We’ve already discussed some of the common benefits of refinancing a car, so let's take a look at some negatives you should avoid.

Additional Considerations

In some cases, refinancing can actually increase the total amount you pay for your vehicle. To ensure that you’re making the right decision, ask yourself the following questions.

  1. Is there any up-front cost to refinancing? Some lenders may include a fee or closing cost when you refinance your loan, so it’s important to find out if they do up front. If there is an additional cost, you need to consider whether refinancing will still be beneficial in the long run.
  2. Will my interest rate change over time? If you are refinancing to get a better rate, make sure your rate is fixed.
  3. How long will I be making payments on my car? If your only reason for refinancing is simply to lower your monthly payment, you can achieve that by refinancing with a new loan term. However, if it extends beyond your original loan’s payoff date, you need to weigh the benefit of monthly savings versus how many additional payments you'll be making.

    For example, you can save $100 per month if you refinance to lower your monthly payment from $500 to $400. However, that may not be the complete picture. If you achieved these savings by extending your loan by 12 months, you may find that the additional $4,800 you pay during those 12 months is greater than the savings you enjoyed after refinancing your loan.
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Pro-Tip:You can use an online auto loan calculator to estimate your monthly payments when weighing the cost versus benefit of refinancing. However, for best results, we recommend working with a loan advisor from an institution you trust to make sure you fully understand all your options.

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How to Refinance Your Auto Loan

After speaking with a professional about the pros and cons of refinancing, you should have a clear understanding of what to expect from your new loan. If you decide to proceed, you can keep the application process flowing smoothly by gathering your important documents beforehand. That means making sure you have the details on your current car loan, like your remaining balance, interest rate, and number of months remaining on the loan. Additionally, to complete the new loan application, you will likely need the following information:

  • Car's vehicle identification number (VIN)
  • Driver's license
  • Social Security card number
  • Pay stubs
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Pro-Tip:You should always check your credit score and view your current credit report before applying for any loan. This will help you to create an accurate budget to determine whether you’re making the right decision. This information will also be especially helpful when working with the loan advisor.


How We Can Help

At First Service, we want to make it easy to get an auto loan that works for you. Whether you’re looking to buy a car or refinance an existing auto loan, we want to make the process simple, fast, and affordable. Our team of experienced loan advisors can help you understand your options and will work with you to get the loan you need.

Complete Your Auto Loan Application Online


[94] No Payments for 60 - 90 Days: This is a limited time offer and subject to change at any time. Subject to credit approval. Interest will accrue during the deferment period.