Timely refinancing can be an effective way to reduce your payments on an outstanding loan. Depending on your situation, refinancing can offer a variety of benefits.
For example, it can help you lower your monthly payments if you’re having trouble keeping up with your bills. Alternatively, it can help you pay off your vehicle faster to eliminate your debt entirely and free up funds in the long term.
If you’re thinking about refinancing your vehicle, you probably have a lot of questions. Can you refinance with a different lender? Can your current lender offer you a better deal? Is this the right time to refinance your vehicle at all? Understanding the process of refinancing can help you answer all these questions effectively.
Thinking of refinancing? Easily compare rates from lenders below.
What Is Car Loan Refinancing?
Car loan refinancing is the process of taking out a new auto loan to pay off the balance on your current one. This new loan effectively closes out your previous auto loan and sets you up with a whole new plan to pay off what you still owe for the vehicle.
Refinancing is an effective way to get new terms on your car loan. If you feel like your existing loan is no longer providing you with the best deal, you should explore your options for refinancing to see how much you can save.
Can You Refinance with a Different Lender?
Refinancing your car loan with a new lender is a popular option, as it can give you access to terms and deals that your current lender doesn’t offer. You should research your options thoroughly any time you take out a loan.
However, challenging circumstances can put a rush on the purchase process for a new car: Perhaps you were without a vehicle and needed to take the fastest option you could find.
You want to believe that your auto lender has your best interests in mind, but this isn’t necessarily true. Most lenders are looking to their bottom line before anything else. If you’re not careful about choosing a lender, you may end up in a costly situation that doesn’t fit your finances.
Dealerships nearly always offer auto financing on the spot through lenders that they partner with. This may seem like a convenient way to get a quick loan, but it robs you of the opportunity to compare your options and find the right fit.
One Oklahoma resident went so far as to file a lawsuit against her lender for approving a loan through the dealership that the lender knew she couldn’t afford.
Lenders understand the finer points of auto loans better than most consumers. The lender knows that they can still make a profit, even if you cannot pay the loan. If you default on the loan, the lender can repossess the vehicle and garnish your wages or tax refunds to collect the debt.
If you’re working with an unscrupulous lender or unmanageable loan terms, it’s often in your best interest to refinance with a different company.
Can You Refinance with the Same Lender?
While you’re not required to refinance your car loan with the same lender, it is an option. You don’t have to go elsewhere just to get a new loan. It’s not always easy to find a lender that you’re happy with. If you like the company that’s managing your current loan, you may find the best option is to stick with them.
A good lender will help you thoroughly explore your options when refinancing an auto loan. They can provide several choices for you to consider. Discuss your reasons for refinancing with your lender, so they can tailor a new loan to suit your needs.
It’s important to note that your original lender may not be servicing your loan anymore. Dealerships may sell your loan to different lenders. Some lending companies will transfer servicing rights for your loan to a third party.
You will receive notice of these changes, but it’s easy to lose track of these types of details. If you’re thinking about refinancing your auto loan, the first thing you should do is check the status of your current loan to make sure you understand who has servicing rights.
How to Choose a Lender When Refinancing an Auto Loan
Choosing your lender is one of the most important decisions you’ll make when refinancing your auto loan. Can you refinance with a different lender? Yes. Should you refinance with a different lender? That depends.
Carefully review the current terms for your auto loan, so you can decide whether you could really get a better deal elsewhere. The only way to accurately determine whether it’s better to refinance with a new lender or your current one is to compare specific loan offers from both. When considering different loans, you should evaluate:
- The Interest Rate: The interest rate on your auto loan determines how much you’ll ultimately pay for your vehicle. For example, if your interest rate is 3% on a 60-month $20,000 loan, you’ll pay a total of $1,562 in interest. Increasing the interest rate to 4% results in a total interest payment of $2,100. This means you’re paying $538 more for an increase of just one percent.
- The Loan Term: The longer you have to pay off your loan, the lower the monthly payments will be. A $20,000 loan with a 4% interest rate costs $368 per month with a 60-month term. If you reduce the term to 36 months, your monthly payments increase to $590. Though you’re paying more each month with a shorter term, you’ll pay less in interest over the life of the loan, so you need to perform a careful balancing act to find the best option.
- The Monthly Payments: Both the interest rate and loan term affect the monthly payments for your auto loan. It’s important to make sure that you can afford the payments, so you don’t find yourself in a difficult financial situation. Extending the length of the loan can give you lower monthly payments, but you need to make sure your loan won’t outlast the life of the vehicle.
With these factors in mind, you can compare loan options with both your current lender and new ones. If you prefer the customer service of the lender you already have, you may want to share your findings with them. They may give you a more competitive rate if they know that you’ve been offered a better loan elsewhere.
When You Should Not Refinance a Car Loan
You should only refinance your car loan if you would benefit from it. You should reconsider refinancing your car if:
- You’re getting ready to apply for another type of loan, such as a mortgage. Applying for a new car loan will impact your credit score, so you shouldn’t start sending out applications at the wrong time.
- You recently purchased your vehicle. Many lenders will not consider refinancing a loan that’s less than six months old.
- Your vehicle is too old. Lenders typically will not refinance if your vehicle has over 100,000 miles or you owe significantly more than it is worth. You can use resources like Car and Driver’s Trade in Tool to determine your car’s value in its current condition.
- You have a prepayment penalty. Carefully consider whether the savings associated with refinancing are greater than the cost of the prepayment fee, especially if you’re near the end of your current loan term.
When You Should Refinance a Car Loan
It’s important to understand the purpose of refinancing so you can time this task appropriately. Done right, refinancing with a different lender or getting a better loan from your current lender will yield great benefits for your budget. You may want to consider refinancing your car loan if:
- Your credit score increased. A higher credit score likely means a lower interest rate for your new loan, which can result in hundreds of dollars in savings.
- You’re in a better financial situation. A higher income can help you get a better loan offer.
- You have a poor interest rate. If you’re paying an unreasonably high interest rate on your car loan, refinancing can help you out significantly, with both your monthly payments and the overall cost of the loan.
- You need lower monthly payments. Refinancing your loan with a longer term and lower interest rate can reduce the amount of money you have to pay each month.
- You want to pay off your car faster. Whether you’re thinking about purchasing a new car or you’re simply ready to get out from under the debt of your loan, refinancing can help you cash in on better terms and a faster repayment plan.
Can refinance your auto loan with a different lender? Yes, you can. However, you should dive deeper into this question to ultimately decide whether you’re better off sticking with your current lender or taking your car loan somewhere else.
Managing this debt mindfully will help you keep your interest charges low while still paying off your car loan as quickly as possible. Explore all your options so you can make the right choices for your personal needs.
Finance & Insurance Editor
Elizabeth Rivelli is a freelance writer with more than three years of experience covering personal finance and insurance. She has extensive knowledge of various insurance lines, including car insurance and property insurance. Her byline has appeared in dozens of online finance publications, like The Balance, Investopedia, Reviews.com, Forbes, and Bankrate.