How to Refinance Your Auto Loan
In doing so, you can lower your monthly car payments and boost your total savings on interest.
You've heard of refinancing your mortgage, which involves applying for an additional loan to pay off your current home loan at a lower interest rate. However, refinancing options are not limited to real estate—you can also refinance your auto loan. By smartly refinancing your auto loan, you can potentially reduce the monthly payments on your car, decrease your interest rate, as well as use it as an opportunity for quick cash in hand. "Refinancing an auto loan is an often overlooked money-saving option, especially now when rates are relatively low," says Rory Joyce, head of Credit Karma Auto. "In fact, based on our analysis, Credit Karma members in the United States who refinance their auto loan have saved an average of nearly $3,000 in total interest over the life of the loan. That is an average savings of $55 per month."
That said, how do you refinance your auto loan and is it even advisable during this time? We spoke with Joyce to share expert insight to refinance your auto loan.
Applying for an Auto Loan
"When you don't have the cash on hand to pay for a new car, a car loan can help you buy it—whether the vehicle is new or used," explains Joyce. "When you get an auto loan, you borrow money from a lender to buy a car. You agree to pay back the funds over a set period of time, plus any fees and interest you accrue." Like refinancing your mortgage, refinancing your auto loan involves signing a new loan to cover the cost of your existing auto loan. Joyce says that most refinanced auto loans are held by the car and then paid off in a predetermined timeframe with a fixed monthly payment, which typically spans over the course of few years.
Like any major financial investment, doing your homework before picking a new loan is smart. By shopping for quotes as a car owner, you're accounting for fees, interest, and down payments. Using a resource such as Credit Karma Auto presents the best deals for your financial situation in addition to using an auto loan calculator which estimates your monthly payments as well as how much you'll be able to borrow.
When to Refinance
Now that you have more insight on what it means to refinance your auto loan, is it a good idea to do so? "Consumers should look into refinancing their auto loan right now if they can, especially during a time when cash is king for many Americans," advises Joyce. "For many people, a car is their biggest asset."
Before signing your new auto loan, keeping your current auto loan in your back pocket as well as your car's value are two key factors in doing so smartly. "The value of your vehicle is important and can impact the amount you receive on the loan," says Joyce. "Cars depreciate in value the longer you own them, so although refinancing can help you avoid a situation in which you owe more on your car than it's worth, it can also make the situation worse if you're not careful."