Should you refinance your auto loan?

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Is now a good time to refinance your auto loan? Interest rates for new and even used car loans are low, but the answer to that question really depends on a few different factors.

In this article we’ll try to help you determine whether now is a good time to refinance with some help from money expert Clark Howard and our Consumer Action Center.

When should you consider refinancing your car loan?

If you have an outstanding loan on a vehicle, you should know that in many cases you can refinance it at any time just like you might a house. But how do you know if you should refinance? Here are a few things to consider…

If your interest rate is too high

“Most people’s car loans are at rates that are way too high, especially for people who have good credit scores,” Clark says.

In the first quarter of 2019, the average auto loan rate obtained by people using the LendingTree platform was 8.35%, according to the company. That may not seem terribly high compared to the rates you might be seeing on your credit cards, but much better rates are available if you have decent credit.

In fact, LendingTree says that average rates for people whose credit scores were at 720 or better were 5.33%, a full three points better.

And Clark says you can likely beat that rate by a good margin if you are smart about shopping for your new loan.

“I recommend that people refinance at a credit union for a shorter term. Let’s say you have 60 months left at 6.5% that a car dealer put you in. If you redo it at, say, 48 months at the 3% a credit union will charge you, you’ve shortened your loan and you’ll spend a tiny fraction of the interest you would have spent otherwise.”

To see how much you could actually save by refinancing at a lower rate and for a shorter term, we ran the numbers through a calculator at Bankrate.com. This assumes you have 60 months remaining with a balance of $20,000 at 6.5% and you refinance for 48 months at 3%:

Bankrate auto loan calculator
Bankrate.com

As you can see from the graphic, by shortening the length of your loan and refinancing at a more favorable rate, you could save more than $2,200 in interest over the life of your loan – and your payment only goes up a little over $50 a month!

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If you want to shorten the length of your loan

Speaking of shortening the length of your loan, that can be an excellent reason to refinance your auto loan. According to LendingTree, the average length of a new car loan today is 69 months. That’s nearly six years!

“If you have one of these loans where you’ve extended it to several years, that’s a real problem because cars depreciate as soon as they are off the lot,” says Consumer Action Center Director Lori Silverman. “That means if you have a car financed for six or seven years, you’re going to be upside-down for a long time.”

Being upside-down means that you owe more on your loan than the current market value of your vehicle. Lenders are much less likely to refinance your loan if you are upside down.

“If you are upside-down and you have money that you could put toward the car so you’re not upside-down, that’s when you’ll get the best rates,” Lori says.

As demonstrated above, you may be able to shorten the length of your loan without significantly increasing your monthly payments. The sooner your loan is paid off, the sooner you can use the money you were paying on the loan to pay down other debt or save for the future.

If your credit score has improved

The last reason to consider refinancing your car loan is if your credit score has improved since you first bought the vehicle and took out the loan. As we said, a better score usually means a better rate. LendingTree has a chart that bears this out:

Auto loan rate by credit score

So, if you’ve been handling credit wisely and notice your score creeping up it’s probably worth shopping auto loan rates again to see if you qualify for something lower than what you’re currently paying.

Final thought

While the idea of refinancing an auto loan isn’t discussed as much as doing a refi on a home, it’s something to consider if you currently owe money on a vehicle.

With a good credit score, there’s a great chance you can find a better rate on a shorter loan term and save a ton of money on interest by the time you pay off your car.

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