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Updated: July 6, 2020 12:25 PM ET | Originally published: March 13, 2020
Money; Getty Images

So you needed a car and you only qualified for a high interest rate. You weren’t happy, but you had to get back on the road. You signed the papers and you drove away. It’s a pretty good car, after all.

This common story doesn’t have to end here, with you facing high car payments, month after month, because of your auto loan’s high interest rate. Especially now with the economic strain caused by the COVID-19 pandemic, having a little extra money every month can help ease some of that tension and make you feel a little more comfortable. Finding a way to reduce your car loan payment is one way of getting that extra cash.

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Refinancing Your Auto Loan Could Lower Your Monthly Payments
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In fact, many people are doing just that. Auto refinance applications have increased dramatically as interest rates approach new lows. According to Annette Kalinowski, Senior Manager of Automotive Product Experience for PenFed, auto refinance activity at the credit union has increased from a monthly average of 20% of all auto loan activity to more than 55%. This trend extends to other auto refinancers as well. “PenFed partners with some other organizations that do refinances specifically, and those partnerships are experiencing a significantly higher number of refinances,” she said.

Refinancing your auto loan could lower your rate, especially if your creditworthiness has increased since you bought the car. A lower interest rate, or a longer borrowing term, could lower your payments. Or you can shorten the term of your loan with a lower interest rate to save money and pay off the loan faster, which will also create savings. You could also decide to take equity out of your car for some extra cash. Whichever your reason for refinancing is, make sure you have a clear goal in mind.

Important Things to Know About Refinancing Auto Loans

  • Refinancing with a longer term should decrease your monthly payments, but please note: with more payments, you could pay more in total interest over the life of the loan. Be sure to balance your month-to-month payment relief with your long-term costs.
  • Interest rates for long-term loans are normally higher than rates on short-term loans.
  • Cash-out refinancing gives you cash back for taking out a larger loan than you need, but you risk owing more than your car is worth. Selling or trading your car could be more difficult.
  • Always keep paying your old auto loan until you get confirmation from your old lender that the loan has been refinanced.
  • Although most people refinance with a new lender, it doesn’t hurt to check with your current lender as well, especially if you have a long credit history with the company.
  • Before applying for a refinance, check with your lender to make sure there are no prepayment penalties that could add to the overall cost of refinancing.

Best Auto Refinance Companies

Here are the top 5 companies to refinance your auto loan:

  1. LendingTree: Best Marketplace for Refinancing Auto Loans
  2. rateGenius: Runner-Up for Best Marketplace
  3. AutoPay: Best for Cash-Out Refinancing
  4. MyAutoLoan.com: Best for Competitive Interest Rates
  5. Auto Credit Express: Best for Poor Credit Auto Refinancing
  6. PenFed: Best for Customer Care

Having so many auto refinance options — both online and through traditional lenders — helps you find the best auto refinance rates, but you can also get overwhelmed in the process of shopping.

Loan comparison websites help you compare quotes from multiple lenders in one place by filling out one application. Here are some good places to start:

LendingTree

COVID-19 Update: Many lenders associated with LendingTree are offering loan deferment programs and other relief for customers having a hard time paying their auto loans. Contact your lender for specific information.

LendingTree pioneered many of the tools we use to compare loans online. This platform has outlasted most of its peers, becoming the nation’s largest online loan marketplace.

LendingTree offers a place to compare rates for just about any financial product, including auto refinance loans.

And this service still innovates. LendingTree now has its own customer support staff so you’ll get more than a place to compare quotes. You’ll still work more directly with the lender you choose from LendingTree’s options, but you could also get some help from LendingTree if you have questions about its service.

LendingTree’s approach is still simple: You’ll submit a short form to get connected with potential lenders. You’ll immediately get rate quotes from up to five potential lenders.

rateGenius

COVID-19 update: Contact your specific lender for information on customer relief programs. Each company will have their own response and relief options. Some lenders have also implemented stricter qualification requirements.

rateGenius, another well-established rate comparison site, specializes in auto loan refinances. rateGenius focuses on keeping refinances within your existing term length so you won’t pay more over the life of your loan.

rateGenius also does more than show offers and pass along your name to potential lenders. This service serves as an intermediary between you and the lender, at least to get started.

After you enter your information, rateGenius will show quotes from its network of over 150 auto refinance companies. If you can get a better rate with one of these lenders, you’ll work directly with rateGenius’ lending specialists to complete your application.

rateGenius will even handle the back-end work such as making sure your old loan gets paid off on time and that your new auto loan is set up correctly.

Autopay

COVID-19 Update: If you need help with your car loan payments, contact your lender for information on relief programs they may have available.

Autopay’s greatest strength? It’s a multitude of options for refinancing. You can use Autopay for a classic auto refinance, but you also have two other options you won’t find with all marketplaces:

  • Cash-out refinancing: When you need extra cash at a low rate.
  • Lease buyouts: When you’re locked into an expensive lease and want to buy a car instead.

Either of these options could solve your current bind, but make sure you’re aware of the long-term costs. For example, cash-out refinancing could swell your new loan too much. If you tried to sell the car next year, the sale price might not pay off your loan.

MyAutoLoan.com

COVID-19 Update: If you need help with your car loan payments, contact your lender for information on relief programs they may have available. Check MyAutoLoan’s recent content article for helpful advice on ways you can navigate the pandemic.

Whether you’re buying from a private party, refinancing, or getting a motorcycle, MyAutoLoan.com can connect you with a wide variety of financing options focusing on low-interest loans.

You will need an income of at least $1,800 per month and a credit score of 500 to submit an application. Shoppers with the best credentials will have the best choices for loans — possibly an APR as low as 2.99 percent.

MyAutoLoan.com partners don’t offer loans less than $8,000, and this service will do a hard check of your credit, so don’t apply unless you’re serious about getting a new loan.

MyAutoLoan.com doesn’t work in Alaska or Hawaii.

Auto Credit Express

COVID-19 Update: If you need help with your car loan payments, contact your lender for information on relief programs they may have available. Look through Auto Credit Express’ blog articles for more information on how to contact your lender.

Refinancing saves the most when your credit has improved since you took out your current loan. If you’ve paid off debts, gotten a raise, or fixed an error on your credit report, refinancing could be a game-changer.

But if your credit’s the same or even worse now, you’re not completely out of luck. Marketplaces like Auto Credit Express could still help, especially when you’ve been making on-time payments on your current loan for at least 18 months.

Auto Credit Express specializes in helping people with average to poor credit get better loans. And, the service won’t hard check your credit, so you won’t make your score worse by trying it out.

PenFed

COVID-19 update: PenFed is offering a 60 day payment deferment on auto refinances as well as added flexibility to their skip a payment option. Contact PenFed directly to find out about all relief options they have.

Although not a lender marketplace, PenFed offers some of the lowest refinance rates on the market for both new and used cars, with zero application or processing fees and no prepayment penalties. Repayment terms range from 36 months to 84 months for a new car refinance and 72 months for a used car, with the ability to refinance 100% of your outstanding car loan balance.

Interest rates start at 2.14% for a new car refinance and 2.99% for a used car refinance. A new car is considered to be one where you are the original owner of the vehicle and it is a 2020 or 2019 model. The maximum loan amount you can get from PenFed is $100,000. The lender also offers credit counseling and works with customers to find the best option to fit their needs.

If you refinance your auto loan from another lender with PenFed by May 31, 2020, you’ll get a $250 bonus after making the first payment on the refinance. However, keep in mind that you can’t refinance an existing PenFed auto loan, only loans from other lenders.

Find a Good Auto Refinance Company

A lot of lenders offer auto refinance loans with top-notch service and affordable auto refinance rates. But auto-lending has its fair share of bad actors who prey on people with shaky finances.

You’ll know these shady players by their exorbitant interest rates and their hidden fees which you can uncover by reading your loan documents before signing.

A good lender will help you understand all your options and which one best fits your goals in the long run. “That’s one of the things that’s really important and that a lender should always discuss with the potential buyer,” said Kalinowski. “How it’s going to affect them long term, not just how it’s affecting them next month on a monthly basis. Get all the facts.”

Even if you found your lender through a marketplace we suggested, take the time to research the lender you’re working with. Here’s how:

  • Look at Financial Stability: Credit rating agencies like Moody’s can help you assess the health of your lender. Healthier lenders tend to offer the best rates, especially when you’re a highly qualified borrower.
  • Check Customer Complaints: Consumers often file complaints with the Consumer Financial Protection Bureau or the Federal Trade Commission. Remember that there’s a big difference between “this company had rude customer service,” and “this company was sued for $20 million last year in a class-action suit.”
  • Expect Transparency: Legitimate companies will be transparent about their operations, partners, and underwriters. If this information is incomplete or missing, move on to another company.
  • Follow the Money: Look out for companies that require you to pay upfront for their services. These platforms are trying to make money off of you instead of making money by connecting you with a quality lender.
  • Find Out About Privacy: Before submitting any of your personal information, find out how the lender or marketplace protects your privacy. Most legitimate sites will publish their privacy policies online.
  • Follow Your Gut: If something feels off with a company, or if the terms of the loan seem too good to be true, trust your gut and walk away.

Know the Refinance Requirements

In order to refinance your auto loan, as with refinancing a mortgage or any other loan, you will have to meet your new lender’s requirements. It’s important to know what these requirements are before applying to ensure you’ll qualify for the new loan.

  • Be current on your payments: You must be up to date with your current car loan payments. Otherwise, it will be difficult, if not impossible, to qualify for a new loan.
  • You cannot be upside down on your current loan: Being upside down on a loan means that you owe more than the car is worth. If this is the case, you won’t be able to refinance your loan. In other words, you need to have equity in your car in order to qualify for a refinance.
  • Meet the new lender’s car requirements: Each lender will have requirements when it comes to the age and mileage on your car. If it is too old or has too many miles on it, you won’t qualify for a refinance.
  • Meet the new lender’s minimum balance requirement: As with age and mileage, each lender has a minimum and maximum amount they’ll refinance. If your current balance is too low or too high, you won’t qualify.
  • Make sure the car title is clear: Lender’s won’t refinance cars that are “branded,” such as rebuilt or salvaged vehicles, or commercial vehicles.

Each lender will have its own requirements. You may qualify with one lender but not another that offers lower rates. Find out what the requirements are prior to applying for a refinance to improve your chances of qualifying.

Refinance Your Auto Loan for the Best Rate

Refinancing your auto loan could save you thousands of dollars, but your new and better loan won’t materialize magically. You’ll have to put in some work upfront. Remember, have a clear goal in mind. What do you expect to gain from this refinance? As Kalinowski points out, you don’t want to refinance if you’re not hitting your personal goals.

Here’s how you can obtain the best auto refinance rates:

Step 1: Get Your Information Ready

Getting a loan requires sharing your personal and financial information. Gathering these details now will save you some time and simplify your application process later:

  • Proof of residence: a utility bill with your home address or your driver’s license will usually work.
  • Proof of insurance: If you can’t find your insurance card, download a new one from your auto insurance company.
  • Proof of employment and income: Your 1040, W2s, 1099s, or a couple of recent pay stubs should do the job. Sometimes a bank statement will suffice, though that’s too private for some people.
  • Details about your car: Know your car’s year, make, model, trim package, mileage, vehicle identification number (VIN), and special modifications.
  • Your current loan information: Find your current lender’s name and contact information, the amount remaining on your loan, the term of your loan, and your current interest rate.
  • Check Your Credit Score: You want to make sure your score has improved enough to qualify for a better interest rate or term. If your score needs improving, take steps to do so before refinancing.

Step 2: Compare Auto Refinance Rates

Online lending marketplaces have given shoppers an easier way to compare multiple quotes, but you could also shop separate lenders and compare the rates yourself.

Be sure you’re comparing identical loans: enter the same loan amount and term lengths each time you get a quote.

Most lenders or marketplaces will run only a soft credit check to give you a rate quote. A soft check shouldn’t affect your credit score.

When you apply for the loan, the lender will run a hard credit check which could drop your score by a few points temporarily. Credit scoring models treat all hard credit checks within a 14-day period as one single credit check, so don’t worry if you apply with multiple lenders in one week.

Rate quotes will give you a good idea what you’d pay for the loan, but don’t be surprised if your final rate doesn’t exactly match your quote — only an actual application that uses your documentation and runs a hard check can finalize your rate.

Step 3: Choose a Loan

Now you can choose the loan with the lowest rate and lock it in, right? Not so fast. Calculating a loan’s full impact on your wallet requires a few more steps.

Along with your monthly payment, you’ll need to know how much interest you’ll pay throughout the life of your loan. An auto loan refinance calculator can show you both numbers. Many lenders have calculators on their sites, but you can always use this one instead.

Consider how this loan will impact your finances going forward and apply your own specific needs:

  • Is saving $50 a month worthwhile when it requires paying an extra $500 in interest over the next five years?
  • Could you pay an extra $100 a month and have your loan paid off a year early, saving $1,000 in interest charges?

Only you can answer these kinds of questions because they depend on your month-to-month needs.

A Case Study in Loan Terms

Let’s look at an example which could help you make your decision about your refinance terms.

Let’s say you took out a four-year, $20,000 loan for a new Honda Civic. At 5 percent APR you’re paying $461 a month.

After making this $461 payment for an entire year, you’ve paid your loan down to $14,971, but those hefty payments have been tough on your monthly budget. You’d like to refinance.

Refinancing your remaining $14,971 into a new 5-year loan at 5.5 percent APR will save you $175 a month, creating much-needed breathing room.

But here’s the actual price tag: You’ll be paying $562 more in overall interest and you’ll be in debt for two more years.

Is it worthwhile to refinance? Again, only you can make that decision. You should determine the actual costs before deciding, though.

Should you do a cash-out refinance?

Sometimes your new loan can provide more money than you’d need to pay off your existing loan. In this case you could keep the extra cash. We call this a “cash out” refinance.

Because auto loans typically have lower rates than credit cards or personal loans, a cash out auto refinance can save money compared to other forms of borrowing. You could use the extra cash to pay off other debts, to improve your home, or even to put money down on another car.

But beware of the downsides:

  • Going Upside Down: This kind of borrowing could turn your auto loan “upside-down” meaning you’d owe more than your car is worth. If you needed to sell the car, your sale price probably wouldn’t generate enough to pay off your loan. You’d have to come up with the rest of the money somehow.
  • Higher Monthly Payments: A larger loan will increase your monthly payment, of course. Decide whether the cash you’re retrieving for the loan justifies higher payments for the next several years. To answer this question, determine the use of your cash before deciding. If the cash eliminates high interest debt, it’s worth it; if the money’s funding random shopping trips, perhaps it’s not worth the extra cost.

Can You Refinance a Car Lease?

Instead of a car loan you may have a leasing agreement with high monthly payments that you’d like to reduce, and are considering whether your lease can be refinanced. Although you could technically refinance your lease, what you’re doing in effect is taking out a loan to buy your car outright, and is usually done once your lease term is up. You may end up with a lower monthly payment, but you’ll likely lose out on the money you’ve already paid into the lease and you could have to pay a prepayment penalty.

Although refinancing may not be an option, you do have other alternatives. You could speak with your lender about a lease replacement, which just means swapping out your current lease for one with more favorable terms and interest rate. Other options for breaking your car lease include transferring the lease, selling your car back to the dealer, or selling the car on your own. However, each of these options have costs associated with them that may require you to pay more money in order to get out of the lease. Evaluate each alternative thoroughly before making the choice to “refinance” or break a lease.

Step 4: Sign the Documents

So you’ve chosen a new loan. You’re borrowing the right amount. You’re OK with the interest charges over time. This is great! Now it’s time to complete the application.

This is where you’ll start working more closely with your lender to complete the process, using the documents you gathered up in Step 1. Some lenders may require extra documents so stay in close communication. Watch your inbox for updates and requests.

Once the application has gone through and you’ve signed the final documents, your new lender will pay off your old loan. It could take a few days to get confirmation your old loan has been paid off.

If your old loan’s payment comes due in the meantime, pay it. Better to pay extra and get a refund later than to lose points on your credit score.

After confirming your old loan has been paid off, you’ll start making payments to your new lender until you pay off your new loan. Each time you make a payment, you’ll be glad you chose a new loan that works for you.

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