When to Refinance Your Car Loan

Refinancing your car loan involves replacing your current loan with a new one, often with a different lender, to secure terms that better match your present financial situation. This can be a smart way to lower your monthly payments or achieve more favorable loan conditions overall. In this article, we’ll explore the main signs that indicate refinancing could be the right move for you.

What is Refinancing?

As Jordan Kaehler, Loan Portfolio Manager at First Alliance Credit Union, explains in a recent Good Money Moves podcast episode, "Refinancing is moving debt from one financial institution to another."

Refinancing can help you take advantage of lower interest rates, reduce your monthly payments, or adjust the loan term to better fit your current budget and financial goals. While the process may seem complex at first, it’s ultimately about putting you in the driver’s seat when it comes to managing your debt and improving your overall financial wellness.

When is the Right Time to Refinance Your Car Loan?

Deciding when to refinance your car loan is a decision that involves considering both your current financial situation and current market trends. There are five key questions to answer to help you determine the right path for you:

Has Your Credit Score Improved?

One crucial factor in deciding if refinancing your car loan makes sense is your credit score. If your credit has improved significantly since you first took out your loan, perhaps you've paid down debt, made payments on time, or otherwise strengthened your credit profile, you may now qualify for a lower interest rate than you did initially.

A better rate can reduce your monthly payments and save you a significant amount in interest over the life of your loan. For many members at First Alliance Credit Union, an improved credit score has served as a green light to explore refinancing options, helping you make the most of the progress you’ve made on your financial journey.

Have Interest Rates Dropped?

Another signal is a drop in interest rates. Market conditions fluctuate, and when interest rates fall, it can be an opportune time to refinance. Lower rates not only reduce your monthly payments but also decrease the total amount of interest you'll pay over the life of the loan. Even a modest dip in rates can lead to meaningful savings, especially if you originally financed your vehicle when rates were higher. 

"Right now is actually a good opportunity depending on when you initially financed your vehicle. The interest rate environment today compared to 2023 is lower," Kaehler points out on the podcast.

Monitoring the current rate environment and staying informed about shifts in the financial market can help you identify if you're in a prime position to benefit from refinancing.

Do You Have Equity In Your Vehicle?

Built-up vehicle equity is another important consideration. If your car’s value has remained stable or even increased since you purchased it, you may have more equity than you realize. This equity puts you in a stronger financial position when refinancing because it can help you secure more favorable loan terms, such as a lower interest rate or reduced monthly payment.

Additionally, if you need extra funds for other expenses, some lenders offer the option to tap into your vehicle’s equity when you refinance, essentially allowing you to "cash out" the difference between your loan balance and your car’s value. Having positive equity not only gives you more flexibility but can also make the refinancing process smoother and more likely to work in your favor.

Can You Afford Your Payments?

Beyond improvements to your credit score or a drop in interest rates, refinancing can also be a helpful solution if you’re facing high monthly car payments that stretch your budget.

By extending the length of your loan, you can spread your remaining balance over a greater number of months, which lowers each monthly payment and can offer much-needed breathing room in your finances. This approach can make your payments more manageable if unexpected expenses arise or your budget becomes tighter, helping you keep your financial goals on track without missing payments or jeopardizing your credit. 

However, as Kaehler advises, "You want to make sure that you know what your goals and needs are before extending the loan term, as it might result in more interest paid over the loan's life."

Has Your Income Improved?

Another personal signal is a change in your financial situation. For example, if you’ve recently received a raise, taken on a new job with higher pay, or added a secondary source of income, it might be a good time to refinance into a shorter loan term.

Doing so allows you to make higher monthly payments, enabling you to pay off your loan more quickly and significantly reduce the total interest you’ll pay over the life of your loan. This approach puts more of your hard-earned money back in your pocket in the long run, helping you reach your financial goals faster.

Watch & Learn: Benefits of Refinancing a Car Loan

Hit play to get expert tips on refinancing your vehicle loan from real lenders!

Scenarios Where Refinancing May Not Be Beneficial

While refinancing can offer many advantages, it's not always the right choice. It’s important to carefully weigh your personal financial circumstances and the true costs involved before moving forward. For some, refinancing may lead to higher overall interest costs, added fees, or less manageable loan terms, depending on the details of your current loan and your vehicle’s value. 

Your Car's Value Has Depreciated

One scenario where refinancing may not be beneficial is if your car's value has significantly depreciated. When your vehicle is worth less than the amount you still owe, commonly known as being "upside-down" or having negative equity, it becomes much harder to qualify for a refinance.

In these situations, lenders are often hesitant to approve a new loan, since the collateral (your car) doesn’t cover the loan balance. Even if refinancing is possible, you may be required to pay the difference between your car’s value and your existing loan upfront, or you might face higher interest rates and less favorable loan terms. Because of these added challenges and potential costs, refinancing when you have negative equity is typically not the best financial move.

It's important to assess your vehicle’s current market value and loan balance before pursuing this option, so you can avoid unnecessary expenses and focus on solutions that better support your financial goals.

The Lender Charges Fees

If you're close to paying off your current loan, the costs associated with refinancing might outweigh the benefits. This is because the fees and expenses that come with refinancing, such as application costs, processing fees, and potential changes to your loan terms, could end up costing more than any savings you'd get from a lower interest rate or reduced payments.

In these situations, it often makes more sense to continue with your existing payments and finish out the loan, rather than starting a new process with added costs, so you can focus on completing your financial goal efficiently. However, it's important to note that not all lenders charge these fees.

For example, First Alliance Credit Union does not charge fees for refinancing, making the process more accessible and affordable for members who want to explore this option without worrying about additional costs.

It Negatively Impacts Your Credit Score

Another consideration is the potential impact on your credit score. When you refinance, lenders will conduct a hard inquiry on your credit report as part of assessing your application. This type of credit check can cause a temporary dip in your credit score, typically just a few points.

For most people, this dip is minimal and your score often rebounds with on-time payments. However, it's something to keep in mind, especially if you plan to apply for other forms of credit, such as a mortgage or a new credit card, in the near future. It’s wise to avoid multiple major credit applications within a short window to help protect your credit standing as you make these important financial decisions.

Choose Credit Unions for Your Refinancing Needs

Refinancing your car loan can be a strategic move to improve your financial situation, but it's essential to understand when it makes sense and evaluate your specific needs and goals. By considering the key signals outlined in this article you can make an informed decision that aligns with your financial well-being.

When it comes to refinancing your car loan, working with a trustworthy lender like First Alliance Credit Union can make the process smoother and more beneficial. First Alliance Credit Union offers competitive rates, personalized service, and a commitment to helping you achieve your financial goals.

As Kaehler emphasizes, "We’re going to honor the rate that's more favorable for you in a changing rate environment." This approach ensures you get the best possible terms for your refinancing needs.

Whether you're looking to lower your interest rate, reduce your monthly payments, or consolidate debt, First Alliance Credit Union is a reliable partner. 

Still not sure if refinancing make sense for you? Talk to our team, we're here to help you make smart financial choices.