Your Auto Loan Refinancing Guide

Your auto loan refinancing guide

You’re curious about refinancing your vehicle and want to know if it’s the best auto financing choice for you. Whether you want to reduce your payment, potentially lower your interest rate or adjust your term, refinancing can be a helpful option.

Much like refinancing a home mortgage, refinancing your vehicle means replacing your current auto loan with a new one. Your new loan pays off the original loan, and you begin making monthly payments on the new one. Use these steps to decide whether refinancing could support your financial goals.

Evaluate your current auto loan

Before you decide if auto loan refinancing is right for you, review your current financing agreement and the condition of your vehicle. Start by looking at how long you have left on your current loan, whether there are prepayment penalties or fees, how much you still owe and what your vehicle may be worth.

• How long do you have left on your current loan? Most auto finance companies require at least 12 months left on the contract to refinance. If you have less, you’re likely better off paying off your current financing agreement.
• Do the companies you're considering have prepayment penalties or fees? These could add to the overall cost of a new financing agreement.
• What is the age of your vehicle and how much do you still owe? A high-mileage vehicle has less resale value. If you owe more on your vehicle than its current market value (negative equity) it can be challenging to refinance.
• What is the value of my vehicle? Check the value at a site like Kelley Blue Book.

Decide when auto loan refinancing makes sense

Refinancing may make sense if your financial situation has changed since you signed your original loan. For example, you may want to see if you qualify for a lower monthly payment, a lower APR or a different loan term.

• Your credit score has improved since you signed your original loan.
• Interest rates are lower than when you first financed your vehicle.
• You want to lower your monthly payment to better fit your budget.
• You want to adjust the length of your auto loan.
• You want to compare refinance options before deciding whether to apply.

Compare payment and APR savings

Before moving forward, compare your current auto loan with potential refinance options. A lower APR may help reduce the total interest you pay over time, while a longer term may lower your monthly payment but increase the total cost of the loan.

Use an online savings calculator to estimate what your new payment could be and how much you could potentially save. Looking at monthly payment, APR and loan term together can help you decide whether the refinance offer fits your goals.

See if you prequalify with no credit impact

Once you determine that you may be a good candidate for auto loan refinancing, see if you prequalify. Prequalification can help you review potential options with no impact to your credit score before you decide whether to submit a full credit application. If you prequalify, you can compare estimated payments, APRs and terms.

Submit your auto loan refinancing application

Once you’re ready to move forward, prepare to submit a credit application. This process does result in a hard inquiry to your credit report, so submit as few of these applications as possible. Hard inquiries can temporarily lower your credit score.

Before submitting a credit application, it may help to check your FICO score, review your debt-to-income ratio and gather documents that support your application:

• W-2s, pay stubs, tax returns or other proof of income
• Recent utility bill, lease agreement or other proof of residency
• Proof of insurance on the vehicle
• Details of your existing loan
• Vehicle details, including year, model, mileage and vehicle identification number, or VIN

Know the drawbacks before refinancing

Be aware that refinancing a vehicle can come with potential risks, which include:

• Increased total cost — Refinancing your vehicle can extend the repayment term, resulting in additional interest payments over time. This can increase the total cost of the auto financing.
• Prepayment penalties — Some auto finance companies may charge prepayment penalties if you pay off your original loan early. These fees can offset any potential savings from refinancing.
• Negative equity — If you owe more on your vehicle than its current market value (negative equity) it can be challenging to refinance. Companies may be hesitant to approve a loan that exceeds the vehicle's worth.
• Credit score impact — Applying for new auto financing and having a hard inquiry on your credit report can temporarily lower your credit score. This could affect your ability to secure favorable terms for future loans.
• Potential hidden fees — It's crucial to carefully review the terms and conditions of a refinancing offer. Some finance companies may have hidden fees or charges that can increase the overall cost of the financing.

Refinancing your auto loan comes with great potential benefits. It can be a helpful option if you want to lower your payment, adjust your term or potentially lower your APR. Carefully assess your unique circumstances, compare payment and APR savings, and understand the potential risks involved. This gives you a balanced picture of your situation and can help you make an informed decision.

By Taylor Provost

GM Financial