When to Refinance Your Auto Loan

Mar 2022 | Auto Loan, Featured, Financial Education

Refinancing an auto loan is essentially getting a loan with new terms. A lower interest rate or longer term can potentially lower your monthly payment, but you may pay more overall.

The two reasons to refinance your auto loan are to either adjust your rate, or to adjust your term.

Adjust your rate

This is done when the rate you currently have is higher than a rate you can get by refinancing.

When to refinance to adjust your rate:

1. Your credit score went up.

An auto loan is the first line of credit for many borrowers, meaning they don’t have a very established credit score at the time that they buy their first vehicle. As you make on-time payments on your auto loan, your score increases. A better credit score means that you can likely refinance at a better rate.

 

2. Your debt-to-income ratio has improved.

In addition to your credit score, lenders also evaluate your monthly income to determine your loan rate. If you have a higher income than when you initially took out the loan, you may be able to get a lower rate.

 

3. Rates are better than when you initially financed.

If you purchased your vehicle when rates were high, it may be smart to refinance your auto loan when rates go down.

 

A brown dog sits in the backseat of a car. Adjust your term.

Typically, this is done to get a longer term, however you may end up paying more overall due to interest payments.

When to refinance for a longer term:

1. If you are having trouble paying bills each month.

You may be able to refinance your loan at a lower monthly payment. Keep in mind, you may not be able to get a lower rate, and it will cause your payoff term to be longer.

 

 

You can refinance for a shorter term but note that there is usually no penalty for making extra payments and paying your loan off early*, so you likely won’t want to refinance for a shorter term unless you can also get a lower rate.

*Ensure you check the conditions of your loan, sometimes there are prepayment penalties for paying off the loan before the term ends.

 

When is it not a good idea to refinance your auto loan?

Brown dog in passenger seat of car. Young woman in driver seat has one hand on steering wheel and one hand on dog.

 

Even if you can get a better rate, refinancing isn’t always the best decision. Hold off refinancing for these reasons:

 

1. You’ll spend more in fees than you’ll save in interest.

There are licensing fees and possibly prepayment penalties associated with refinancing your existing loan. Be sure to check the conditions of your current loan carefully to ensure there won’t be significant fees and penalties to refinancing your loan.
If you have already paid off most of your original loan, there’s a chance you won’t save enough in interest to make refinancing worthwhile.
This calculator can help you determine how much you will save in interest when you refinance

 

 

2. Your vehicle is old or has high mileage.

Older cars will have higher loan rates than new cars, and many financial institutions won’t even finance vehicles older than seven years old or with high mileage.
Refinancing an older vehicle can also lead to being “upside down” in a loan, meaning that you owe more on the vehicle than it is worth.

 

3. You have plans to apply for more credit soon.

Refinancing your vehicle requires a “hard pull” on your credit, which will negatively impact your credit score. This can lead to challenges if you want to apply for another loan or line of credit in the near future.

 

What are the next steps for refinancing your auto loan?

Contact the Alaska Air Group Credit Union loan department at loans@aagcu.org or call 206-824-9800 (option 1 for loans) to get started! Bring us your auto loan from another financial institution and we will beat it by at least .50% APR*!

What you will need:
  1. Information on your current loan:
    1. Lender
    2. Account Number
    3. Loan Balance
  2. Information about your vehicle:
    1. Make
    2. Model
    3. Year
    4. VIN (Vehicle Identification Number)
  3. Information about yourself:
    1. Employer
    2. Income
    3. Rent/Mortgage

*On approval of credit. Some restrictions may apply.

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