Americans are struggling to keep up with their auto loans. The average monthly car payment has shot up nearly 30% since 2020, according to online auto resource Edmunds. Delinquincies and repossessions are hitting historic highs.
According to a recent TransUnion survey, nearly two-thirds (63%) of respondents said they're considering refinancing within the next 12 months.
But is it the right move for you?
Ask yourself these four questions before you decide.
1. Has your credit score improved?
Your original lender considered your credit history when setting your rate. If your score has gone up since then, you're more likely to qualify for a better rate now.
Having excellent credit (a 750 FICO Score or higher) will help get you the best terms, but a substantial increase of any kind can be enough to get you approved for a lower rate.
"I'd say an improvement of at least 50 points would make it worth looking into refinancing," said Brian Moody, an editor at Cox Automotive, which owns Kelley Blue Book.
2. Have rates gone down?
Because interest rates on car loans have been at record highs for the past two years, people with older loans are facing a different reality, according to Ivan Drury, director of insights at Edmunds.
"If you have a loan from 2019, your interest rate on a new car was probably a lot lower, maybe 4% or 5%," Drury said. "Today, you're looking at something closer to 7%."
Keep an eye on upcoming Fed meetings to see how they impact auto loan interest rates and plan accordingly.
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3. How much do you have left on your loan?
To secure their investment, lenders frontload interest at the beginning of your car loan. If you're in the final years of financing, interest is probably only a small portion of your bill. You're mostly paying down the principal.
Refinancing in that situation might not make sense, since you'd restart the interest payment process all over.
"Break out the calculator," Drury said. "It's not fun math, but thankfully, there are calculators. You can see on your loan statements how much of your payment has been going toward interest now versus how much is toward the principal."
4. Are you looking for a better rate or a longer term?
If you're worried about falling behind on payments or even your car being repossessed, refinancing could get you a longer term with smaller, more manageable monthly payments.
Keep in mind, though, that while your monthly payments will be smaller, you'll have a longer term and could easily wind up paying a lot more in the long run.
Be sure to factor in any loan acquisition fee or prepayment penalty, as well.
Auto loan refinancing FAQs
How does auto loan refinancing work?
Auto loan refinancing allows you to substitute your existing financing with a new loan, ideally at a lower rate and/or a different term length.
When can I refinance my auto loan?
There’s no set waiting period for refinancing, but you can’t get a new loan until your original lender receives the car’s title from the manufacturer or previous owner, which can take up to two or three months. If you’re concerned about your credit, you should wait at least six months. That’s long enough for your credit score to recover from any drop caused by the initial lender's hard inquiry. Waiting a year after the original loan could improve your score even more if you're able to make on-time payments in full during that time.
Who can refinance their auto loan?
You must meet certain requirements to refinance, like being up to date on your loan payments and meeting the lender's credit score and income requirements. There may also be limits on the car's age and mileage and the loan balance.
Can I refinance if I owe more on the loan than the car is worth?
Your car is collateral for the loan, so some lenders won't lend more than 100% of the value of the vehicle. The ones that will usually require good credit and have limits on how much negative equity they'll finance.
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