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When To Refinance Your Car Loan and When Not To

Find out when it is a good idea to refinance your car loan—and when it is not—with this helpful insight from TDECU.

When To Refinance Your Car Loan and When Not To


The process of refinancing a loan—or, replacing one or more current loans with a new one, sometimes with a new lender—can prove beneficial in a number of circumstances. Deciding whether or not to replace your current loan means considering many factors, including current interest rates, your current credit score, the terms of your existing loan, your income, and more. Understanding these factors will help you best assess whether or not refinancing your car loan has the potential to save you money. There are, however, situations where it would prove more beneficial to remain with your current loan.

In What Situations Should You Consider Refinancing a Car Loan?

The primary reason to consider auto loan refinancing is to save yourself money. If any of the following scenarios apply to you, a refinanced loan may be a good choice!

  • Interest rates have gone down. Most interest rates for auto loans will fluctuate. If a significant amount of time has passed since you signed your current loan, it's possible interest rates are lower.
  • Your credit score has improved. Even if interest rates don’t change, if you’ve been able to improve your credit score since taking out your current auto loan, you may qualify for better terms and a better interest rate.
  • Your current loan is from the dealer. Car dealers tend to charge higher interest rates over a bank or credit union. Simply refinancing with a new lender may mean lower rates for you.
  • You need a lower monthly car payment. Refinancing your car loan can also provide lower monthly payments. If you have a tighter budget than when you originally took out your current car loan, you can refinance your loan to extend over a longer-term—for instance, from 36 months to 48 months. However, it is important to keep in mind this means you will pay more over the life of the loan, despite the lower monthly payments.
  • If your car is “underwater” or “upside-down”. A car loan goes "underwater" or "upside-down” when the owner owes more on repayment of the current loan than the car itself is actually worth. Financial institutions will usually avoid refinancing if the borrower owes more than the car’s value, but refinancing to shorten your loan term could prove beneficial. On a shorter-term with lower interest rates, more of your payments will go toward your principal (the initial loan amount, without interest), which will help you recover equity quicker.

When Should You Not Refinance Your Car Loan?

While it is important to understand how refinancing your car loan can benefit your wallet, it is also important to understand when it would be in your best interest to remain with your current loan and lender. If you find your current situation described below, it may not be the ideal time to refinance your car loan.

  • You’re far along in the repayment of your current loan. Through the process of repaying your loan, interest charges gradually decrease over the life of the loan. Therefore, refinancing a loan holds the most potential to save you money when you’re in the early stages of repaying your initial loan.
  • Your car has high mileage. If you’re driving a car that has significantly depreciated in value, such as an old car with high mileage, lenders may not be willing to issue a loan with better rates than you currently have.
  • Your current loan has a prepayment penalty. Some lenders charge a fee for paying off a car loan early. Before you refinance your loan, make sure you are clear of any such terms, conditions, and potential fees with your current loan.
  • You bought your car less than 6 months ago. While you are able to refinance your loan at any point you wish, if you have a new car, it may be best to wait 6 months to 1 year in order to build a positive repayment history, and to allow your credit score to benefit from your consistent payments.

Still unsure about whether or not you should refinance your car loan? Try out TDECU's auto loan calculator to determine how much you stand to save.




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