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How (And Why) To Refinance Your Auto Loan

What does every sixteen-year-old want for their birthday? A car.  Heck, who doesn’t savor that new car smell? Unfortunately, that excitement can cause us to enter some pretty bad deals. If that happened to you, worry not, you can always refinance your auto loan. We’ll walk you through the reasons to refinance, some of the potential downsides, and what you should know before you research new deals.

The Pros Of Auto Refinancing

  1. Lower Your Monthly Loan Payments– This is typically the primary reason for refinancing. Refinancing your auto loan can depend on your current rates, save you hundreds of dollars a month, freeing up much-needed cash flow.
  2. Paying Less Interest On Your Auto Loan – The price you see on the sticker is not the price you end up paying (unless you pay it in full in cash). If you finance your car, interest will be added to your total cost. It’s just spread across the duration of your repayments. For example, a $15,000 car financed at 3.5% for 60-months, will cost you $16,380. If you had the same deal financed at 3.0%, it would save you $180.
  3. Removing Or Adding A Co-Signer – If you were young or had poor credit when you purchased your car, you likely did so with the aid of a co-signer. Years later, sharing ownership with your parents maybe isn’t ideal. When you refinance your car loan, it is a whole new agreement.
  4. Take Advantage Of A Refinance Promotion – Many financial institutions offer an auto refinance promotion of some kind. Along, with lowering your interest rate or receiving a more favorable term, you can receive gift cards, additional rate discounts, cashback incentives, or even a period of no payments by just refinancing your auto loan at a different financial institution. You can check out our current auto loan promotions here. 


The Cons Of Auto Refinancing

  1. You Might Spend More Longterm – A common way to get a lower monthly payment is to extend the terms of your car loan. Imagine that your original loan was for $15,000 financed at 3.5% for 48-months. Your monthly payment would be $335. To keep this situation simple, we’ll pretend you’re refinancing the full $15,000 at the same rate of 3.5% but you extend the loan term to 60-months. Your new monthly payment drops to $273. Having the extra $62 a month might be worth the change, but you should know the tradeoff. With the 48-month loan, the total amount you payback would be $16,080. At 60-months, the total amount you pay is $16,380.
  2. Your Credit Score Might Be Impacted– Refinancing your auto loan can impact your credit score for the negative. But, in most cases, your score will only suffer a small and temporary dip. There are three major areas refinancing will affect.

Credit Inquiry

Any financial institution will need to pull your credit score in order to determine what rates they can offer. Too many hard pulls during a period of time will hurt your credit score. You can help minimize the impact by researching institutions before you apply to know who is offering the best score. If you know your score, you can ask what rates they believe they could provide. Once you are ready to apply, try to submit all of your applications within a 14-day window. These inquiries will typically be grouped into one incident.

Change In Credit Utilization

Credit utilization is the percentage of your credit that you have currently spent. For example, if you have a $100 credit card limit and you buy something that costs $30, you are utilizing 30% of your credit. A general rule of thumb for creating a good credit score is to not use more than 30% of your credit. Refinancing your auto loan can change the percent of credit that you are utilizing, which could result in a lowered score.

Change In Payment History

Your history of loan repayments is arguably the most important factor in establishing good credit as is the age of credit lines. When you refinance, you essentially delete the previous line of credit, which would remove that age or credit and those on time repayments. Another potential hiccup is missing the last payment on the old loan.

Hot Tip: Tracking your credit score is easier than ever with SavvyMoney®, a free online tool exclusively for Fitzsimons members. Unlock the keys to financial freedom by viewing your TransUnion® credit report and score. Set up timely alerts so you know if anyone’s accessed your credit report or fraudulently opened accounts in your name. Get started here.

When Should You Refinance Your Auto Loan

  1. Your Credit Score Improved – It’s common for someone to buy a car when their credit is, well, not good. But as you get older and your credit improves you gain access to better deals. This is one of many reasons why knowing your credit score is so important. If your score goes from good to excellent, it might be a good time to consider refinancing.
  2. Rates Have Dropped – You might have seen that interest rates are currently on the rise. When the FED raises interest rates, so do banks and credit unions. Of course, sometimes interest rates go down. If you financed your car during a time of high rates and then the rates drop, it is a good time to consider refinancing. Check out our current rates here.
  3. You’ve Established Enough Payment History – Many of us find the car that we like and then get financing through the dealer… and those aren’t always the best deals. Driving your new car home you might pass by a community financial institution’s billboard only to realize they offer a much better rate. Unfortunately, it’s hard to do a return on a 4-year loan. If this is your first car, you will need to establish some repayment history before you consider refinancing, typically 1-year. If you have a longer credit history, you can consider looking at refinancing your car loan after 6-months.

What Do You Need Before Refinancing

  1. Your Credit Score – Knowing your credit score is important to determine what refinancing offers you could expect. If your credit score has gone down, it is unlikely that you’ll find an offer that is in your favor. Luckily, everyone is entitled to know their credit score for free from each of the Credit Bureaus. Keep track of your credit score with SavvyMoney, our free credit monitoring tool.
  2. Your Car Details – Financial institutions will want to know details about the vehicle you are refinancing. Be prepared with your:
    1. Make and model
    2. VIN number
    3. Mileage
  3. Research – If you’ve read this post, you’re already well on your way. You know the reasons that you should refinance and some of the reasons that it might not be in your best interest. Now it’s a question of finding the best deal for you. Like shopping for a car, you should research different institutions in your area. Don’t just look at rates. Consider their service, features, and digital capabilities. Repaying the loan should be easier than taking it out.

Fitzsimons makes loan payments a breeze with our loan payment portal.

Ready to Refinance?

Learn about our latest auto loan refinance offers here.


Blog Credit Savvy Money Updated by Andrew Swinney