How Much Does it Cost to Refinance a Car?

Do you want a more affordable monthly payment on your car loan? Or maybe your interest rate was high when you initially got the loan, and you believe there are better options out there? Either way, you can refinance your car loan to lower your payment or get more competitive loan terms. But refinancing comes at a cost, and you should run the numbers to determine if it’s a wise financial decision for you.

Is Car Refinancing a Good Option for You?

Refinancing isn’t for everyone. It’s a big decision that depends on your finances and a few factors that are out of your control. Refinancing your car loan may be a good idea in these scenarios:

• Interest Rates Have Gone Down: If market conditions have changed since you got your current loan, there’s a chance interest rates have gone down. To illustrate, assume you took out a $35,000, 48-month auto loan with a 6 percent interest rate. Your original monthly payment would be $822. Now, suppose you refinance into a new loan with the same repayment period once the balance reaches $27,000 to get a 3 percent interest rate. The monthly payment amount would drop to $619.76, which equates to a cost savings of $202.24 per month.
• You Have Improved Your Credit Score: It’s also possible that your interest rate could be lower if your credit score has improved. A higher credit score makes you less risky to lenders, and this setup can provide you with a lower rate. You should also examine how loan rates have changed. A significant increase in your credit score may offset higher interest rates.
• You Want to Switch Lenders: If your current lender isn’t quite working for you, refinancing is a simple way to take your business elsewhere. You can refinance with the same lender, but you may find better terms with another financial institution, credit union, or online lender.
• You want to modify who’s on the loan: Some lenders allow you to remove or add a co-borrower to your car loan when you refinance. Borrowers can also remove co-signers from their loans using this method.
• You Want Lower Monthly Payments: Your new lender will likely extend your current loan term to lower the monthly payment when you refinance. The extended loan term spreads your monthly payments across more intervals, allowing you to secure more room in your monthly budget. While the new amount could work for your budget, the loan could cost you more in interest over time unless you snag a lower interest rate and go for a shorter term.
• You Want to Get Out of Debt Sooner: It’s possible to refinance your loan to shorten its duration or make some of the payment upfront. These strategies increase your monthly payment but also get you out of debt sooner. Some people want the ease of knowing they will have one less financial obligation in their monthly budget.

When It’s Not a Good Idea to Get a Car Refinance

Every financial product has pros and cons, and it’s not a good idea to only be aware of one side of the argument. However, understanding the disadvantages of car refinancing can help you weigh if this loan is a good idea for you. Here are some concerns that may show up:

• Higher costs: A refinance can save you money, but those extra costs can wipe out your profits. You should calculate the return from a refinance and deduct the expenses to determine if you still break even or make a profit. Car refinances are typically better when you still have a high balance. That’s more money subject to the lower interest rate.
• More interest payments: If you extend the life of your loan, you will make additional interest payments. These payments do not get you closer to owning your car debt-free. If you want to get out of debt sooner, it may be better to stick with your current loan. Borrowers with higher incomes may consider shortening the loan’s duration to speed up the debt repayment process.
• The original loan has good terms: Some borrowers had good credit scores and secured auto loans when interest rates were at their historical lows. It can take a long time for interest rates to return to those levels if they ever do. It may be worth holding onto the original loan to keep the low interest rate.
• The car is worth less than the loan: A new lender may require you to pay gap insurance to compensate for this difference. That will increase your total costs and can also result in a higher interest rate.
• Your car is used and has a lot of miles: Used cars, especially vehicles with many miles, are riskier for lenders. This translates into higher interest rates and lower approval odds for borrowers.
• Your remaining balance is very little: Smaller balances are easier to pay off, and it’s also more difficult to profit from a refinance on a smaller loan.

Primary Factors Impacting Car Refinancing Costs

Car refinancing costs vary for each person. These are some of the factors that will determine your costs.

Interest Rates

A higher annual percentage rate (APR) will translate into higher monthly payments. It’s a good idea to compare the rate on your current auto loan with the available options.

Loan Duration

If you get a longer term after your refinance, you will reduce your monthly payments but pay more interest in the long run. Putting cash into the refinance can reduce the loan’s duration and result in lower interest accumulation.

Credit Score

Building a strong credit history can help you get better rates and terms for various financial products, not just auto loans. Borrowers with bad credit will have to contend with higher costs and may have a more difficult time getting approved.

Vehicle Age and Condition

The model year impacts the terms you will receive for your refinance loan. Older vehicles have higher rates, and not all cars are eligible for refinances. Customers with newer cars tend to get more favorable rates.

Outstanding Amount

A higher loan amount will result in higher closing costs. Paying off some of your loan balance before getting a refinance can result in more favorable terms.

Prepayment Penalties

Changing your current rate and terms can help you save money on your new loan, but you will likely have to pay additional fees for swapping your current loan for a new one. You should calculate the prepayment penalties for your old loan before committing to a refinance. That way, you’ll have a better idea of what to expect.

Typical Car Refinancing Costs

Before you apply for auto loan refinancing, some costs must be considered. These costs can wipe out your profits if you are not careful. But, on the other hand, a refinance can put you in the red if it has too many costs:

Early Termination Fee

Some lenders will penalize you for paying off your car loan early, even if it’s through refinancing. This expense is also known as the prepayment penalty.

Transaction Fee

You could incur transaction fees from your old and new lenders when you refinance your auto loan.

Registration Fee

Depending on what state you currently live in, you may have to register your vehicle again when refinancing your ride.

Title Transfer Fee

You could also be hit with a title transfer fee to give the new lender possession of the title.

Tips to Minimize the Cost of Refinancing

You will come across many loan options as you conduct research and go through the application process for several opportunities. While refinances can get expensive, this information can help you keep your costs low.

Improve Your Credit Score

Raising your score well above the minimum credit score requirement will increase your chances of getting approved and securing a better rate. Lenders will review your personal information before approving your application, and they will prioritize details like your credit profile and how much money you make. Lenders offer more favorable repayment terms for borrowers who have high credit scores since these borrowers are less risky.

You can add more points to your credit score by making on-time payments and paying off your credit card debt. There are other strategies you can use, but those two tactics are the foundation for meaningful credit building.

Consider Refinancing to Short-Term Loans

A short-term loan agreement reduces interest accumulation. It’s one of the best ways to save money in the long run since you get out of debt sooner. It’s not practical for everyone to trim a few months of their auto loans, and you will have to make a modest down payment to avoid higher monthly payments. You should assess your financial situation before committing to a short-term loan.

Avoid Additional Financing Features

You shouldn’t pursue a fancy loan with various add-ons. Keeping these features to a minimum or avoiding them entirely can keep your costs low. Only get what you need.

Shop Around for Good Deals

You can find the best auto refinance rates if you continue to shop around and compare loan offers from various banks, credit unions, and online lenders. Car owners can also save money on upfront costs by reviewing different lenders and seeing which one aligns with their financial needs.

Frequently Asked Questions