Should I Refinance My Car Loan? 4 Questions To Ask Yourself

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Do you have a car loan with a higher interest rate than what you’re seeing advertised as available right now? And are you looking for a way to alleviate that strain on your monthly budget?

Refinancing your auto loan is actually a fairly simple process that can help you save some serious money. Many car loans can be refinanced without loan origination fees or prepayment penalties, which means you should see the benefits of a lower interest rate immediately.

But before you start shopping for a new loan, there are some questions you need to answer to determine whether it makes sense for you to refinance.

Team Clark has sought the advice of money expert Clark Howard on the topic, and we’ve trimmed things down to four questions you should ask yourself before moving forward with refinancing your car loan.


Table of Contents


Clark Howard’s Simple Rule for Refinancing a Car Loan

Before we get started looking at your personal situation, let’s first take a look at Clark’s general rule for refinancing a car loan:

If you can qualify for an interest rate that is lower than the rate on your existing auto loan, you should move forward with refinancing — as long as you do not extend the term of your loan.

So if you can lower your payment without extending the term, you should see money back in your pocket starting with the very first payment on your new loan.

“The neat thing about refinancing an automobile is that there is no payback period. You save money from the first month when you refinance a car loan,” Clark says. “And what I’ve experienced over the years is that people are just shocked by that. Many didn’t even know you can do that.”

If you want more details on Clark’s take on refinancing car loans, check out our discussion here.


Question 1: What Are the Terms of My Existing Car Loan?

The first thing you want to investigate: the nitty, gritty details of your existing car loan.

Before you can decide whether you’re a good candidate for a new loan, you must understand the specifics of what you have now.

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The information you need to gather includes:

  • Existing interest rate: We’re going to use this to evaluate whether the market conditions will actually provide you a better interest rate on a refinance. If the rate you have is lower than those currently in the market, you’re likely going to want to stay in your existing loan. More on that later.
  • How many monthly payments are remaining: We’re going to use this to measure the term portion of Clark’s rule for refinancing. In addition to lowering your interest rate, we also want to make sure that you shorten or at least hold steady on the time it will take you to pay off your loan.
  • The principal balance remaining on your loan: This is the amount of money you still owe on your current loan. You need this to help get an approximation of what your monthly payments would be after refinancing.
  • The “payoff balance”: This is a little different from the principal balance. It’s the amount your current loan provider will require from your new lender to zero out your balance on the day the transaction happens. This typically needs to be narrowed down to an exact date so that daily interest can be calculated. You won’t need to request this number until you’re actually ready to get a new loan, but it’s helpful to know who to contact to get the information and to know a closely-estimated amount.

Although prepayment penalties are rare among auto loans, you need to make sure that there’s no penalty for paying off your existing loan ahead of schedule. If there is, you need to factor this into your decision-making process.


Question 2: What Is the Current Value of My Vehicle?

You probably looked this up when you initially purchased the vehicle, but you’ll need an updated approximation of your car’s worth.

There are factors that could affect the value:

  • Age: As they age, the value of vehicles generally goes down. The rate at which they depreciate depends on the type of vehicle you have.
  • Mileage: Assuming this car hasn’t been sitting in your driveway since the day you bought it, the mileage has gone up, and that brings value down.
  • Damage: Were you in a fender bender? That may show up on the reports for the vehicle and could drive down the value. Even if there’s nothing on record, cosmetic defects can ding your car’s present-day value.
  • Maintenance: While routine things like regularly-scheduled oil changes can help extend the life of your car, there are plenty of maintenance issues that could negatively impact your vehicle’s value. Just a few examples: worn tires, non-functioning air conditioning or lights burned out.

If you’re wondering what is on record about your car, here are three ways to check your VIN report for free.

Where to Look for Vehicle Valuation

When you approach a lender about refinancing a car loan, you should expect that they’ll use their own metrics to determine the approximate value of your vehicle. They’ll factor in things like age, mileage and the market value of similar vehicles.

To simplify this process, many of them use third-party services to approximate the amount of money they’re able to lend you based on the vehicle’s “book value.”

You can access free consumer-oriented calculators from several of these same services to get a sneak peek at what your vehicle’s valuation may be:

You Could Be “Upside Down” on Your Current Car Loan

You may be wondering why the current value of your vehicle is so important. After all, you’re not trying to sell it.

The short answer is that you may have to bring money to the table to get a new loan if you’re what’s known as “upside-down” on your current loan. Being upside down on the loan means that you owe more on the principal balance than the car is worth in the marketplace.

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Obviously, this could be a stumbling block for your refinancing efforts.

Your new lender is likely to give you a loan for 100% or slightly more of the present-day value of the vehicle, but they’re not going to risk loaning you more money than what your vehicle is worth.

So if you owe $20,000 on a vehicle that’s worth just $15,000, you’re unlikely to qualify for a refinanced loan unless you can pay $5,000 upfront.


Question 3: Can I Actually Save Money with a New Loan?

Now that you’re equipped with all the prerequisite information you’re going to need for a refinanced loan, you should shop for rates — and then pull out your calculator to do some math.

Clark’s auto refinancing rule should be your guide, but there may be some grey areas in the decision-making process when determining how much savings are actually worth taking on a new loan.

Let’s walk through a few things you’re going to want to check as you try to determine the value of a car loan refinance in your overall financial life:

Get Some Quotes for Refinanced Car Loan Rates

Clark says that credit unions are his preferred place to shop for car loan rates. And he says you need only a couple of quotes to get a handle on what’s available versus what you’re paying now.

But it’s important to know that a lender’s lowest advertised rates are not necessarily a given for you. In fact, many lenders will quote only general ranges for rates until they can get more specifics on your vehicle and your credit profile.

Here’s an example of a typical rate “menu”:

Navy Federal Credit Union has a full menu of car loan rates.
Rates from Navy Federal Credit Union in January 2021

As you can see, this gives you an approximation of the “best-case scenario” for a loan in each category, but you’ll have to go a step further than searching their website to get a specific rate from them. It should take only a phone call to get a more specific quote.

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Do the Math: Do Your Quotes Actual Improve Your Car Loan?

Equipped with the information on your existing loan, the current value of your vehicle and a couple of quotes for refinanced loans, you should now be able to get an accurate picture of what your bottom line will look like.

You can make use of an auto loan calculator, such as this one, to play out scenarios for your current loan versus the terms of the new proposed loans.

Here’s a sample of what type of information you can obtain by plugging each rate into the auto loan calculator:

A car loan calculator can be a great tool while refinancing.
Calculator.net

Your principal will be the same no matter which loan you use, so you’re really analyzing what the new interest rate and term will do to your monthly payment and the total amount of interest owed.

Remember Clark’s rule: You’re going to want to make sure you’re saving money on interest AND  shortening (or at least maintaining) the time left on the loan.


Question 4: Are My Finances in the Right Spot To Apply for a New Loan?

Now that you have all the numbers laid out in front of you, this is the final question to ask yourself.

Are your finances in the right spot to make this move right now?

The answer may involve considering a few more things than you’d expect:

  • Credit score: Has it gone up or down significantly since the last time you applied for a car loan? You can check your credit score for free in several different places. Many lenders use your credit score as a factor in determining your interest rate. So you want to make sure it has improved or at least remained constant if you expect to get a better rate than you have on your existing loan.
  • Employment status: Are you making more or less money than you made when you took your original loan? If you’ve seen a significant dip in income, there’s a chance that lenders will shy away from writing a new loan on your vehicle for fear of default.
  • Big purchases coming up: A refinanced car loan is going to require a new inquiry on your credit, and that will likely change your credit score, debt ratios and credit history at least in the short term. If you’re planning a major life purchase, such as a new home or a mortgage refinance, you’re probably better off waiting until after those major purchases are complete before you tackle refinancing your car.

Car Loan Checklist

Click here to download our free printable checklist.Clark's free car loan refinance checklist


Final Thought

When compared to mortgage refinancing, the decision process for a car loan refinance is much more straightforward.

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You don’t have to worry about paying closing costs or buying down points on your loan. For the most part, what you see is what you get on an auto loan. The entire process can be completed in a matter of days.

If you address the four questions above and the answers point to a refinance, great!

Just follow Clark’s rule for your new loan and you’ll be on your way to saving money as soon as the ink is dry on your new loan agreement!

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