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Is Auto Refinancing Right for You?

If one of your 2021 goals is to improve your financial wellness, you’re likely scrutinizing your monthly budget to see where you can trim your bills, and one painless way is by reducing interest charges. As you consider various options to save money, one that might not immediately jump to mind is refinancing an auto loan, but it deserves a close look.

What is auto refinancing? Simply put, “refinancing” means you take out a new loan, and the new lender pays off your old loan, and then you make your payments to them. Refinancing to a lower interest rate can free up money in your budget to accelerate your savings or cover some of those splurges you deserve. (Road trip!)

Here are some questions that can help determine if the benefits of auto refinancing are right for you.

1. Has your credit score recently improved?

You may not know that your credit score directly impacts how much interest you pay – the higher the number, the more appealing you are as a borrower. (Not sure what yours is? You can get a free look at Your credit score is directly affected by factors such as timely payment of bills and keeping your credit usage low. If you’ve recently cleaned up your financial habits, you might see a boost in your score that will earn you a lower interest rate, which can potentially save you thousands over the life of the loan.

2. Have interest rates dropped since you first bought your car?

Your interest rate is the amount your lender charges for the use of their money. Interest rates are based on a variety of factors, but they start with the federal rate. Currently, interest rates are at historic lows, so it’s quite likely the rate has fallen since you got your loan. It’s wise to ask your bank or another creditor about the interest rate they are offering so you can compare it and see if you would save money with a simple refinance. 

3. Were you locked into a high dealer rate?

Many car shoppers are wooed by the deal offered at the point of purchase and don’t realize they can shop around. But often, car dealers offer higher rates than you might find elsewhere, such as at your local bank. It’s worth a few phone calls or online searches to see if you could qualify for a better rate just by moving your loan to a different lender.

4. Do you want to pay off your loan faster?

As you analyze your budget, you may see that you have excess funds right now, perhaps from saving on your commute or a vacation that’s been put on hold. While many people have been feeling an economic pinch, others have augmented their savings, which means you might have extra cash to devote to a slightly higher payment. The benefit is that paying a relatively small incremental amount today can save you big bucks over the long run. Talk to a banker about the various loan terms they offer and see how much you can eventually save by paying a little extra now.

5. Or, do you want to lower your payment with a longer-term?

Conversely, many consumers are facing unexpected financial hardships and might be overcommitted with their fixed bills, such as their rent or mortgage, utilities, and, yes, that car payment. Refinancing to a longer-term, say, stretching your payments out an extra year, can cut the monthly payment and offer more flexibility in a tight budget.

6. Will there be any prepayment penalties?

Sometimes lenders want to keep your business by charging a penalty if you pay off your loan early, which is essentially what you are doing when you refinance with another provider. Check your current agreement to ensure there are no penalties as they could negate any financial benefits you would see from a refinance.

7. Are you planning to make a large purchase, such as a home?

When you pursue an auto refinance, your new lender will perform a credit check, which can cause a temporary negative impact on your credit score. It’s known as a “hard inquiry,” or “hard pull,” which means the credit agency makes an official note that someone checked your credit. They note this because future potential lenders want to make sure you’re not juggling too many bills at once, and getting new credit could be an indicator. While your score will rebound relatively quickly, it’s important to factor in this potential minor slide if you’re trying to buy a home or make another large purchase that requires credit. If so, you might want to hold off on your auto refinance.

8. Is your car already almost paid off?

If you only have a few payments left on your auto loan (congratulations!), it might not make financial sense to refinance. That’s because of how auto loans work – the majority of your early payments consist of interest, and then those later payments are when you start digging into the principal. So if you’ve already made the majority of your payments and thus paid most of the interest, you might not gain by refinancing, given that the goal is to reduce that rate.

9. Does your current lender offer flexible terms?

Ultimately, you want to make sure that your car payment works within the budget you have now. That’s why it’s time well spent to research your interest rate, loan term, and other factors that can help you manage your budget. Also see whether you can set up your bill with autopay, since on-time payments help protect your credit score, and give you one less thing to remember each month. Some lenders might even offer a discount if you have other accounts with them, so make sure to check into all your potential savings options, which will make your drives around town a little more carefree.

Wondering if an auto refi makes sense for you? Talk to a banker at Old National Bank to explore your options.


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