Borrowing money for a car can feel like a questionable financial decision, but there are definitely scenarios where car loans can help you move forward. For example, new cars often come with financing offers at 0% APR, and people with good credit often pay low interest rates that match mortgage rates. Not only that, but renting a car may be the only way for you to plan transportation to and from work.
So what’s the problem? By and large, Americans have taken to borrowing more auto loans than they can reasonably afford. We know this because the average car loan amount is not only getting bigger every year, it keeps getting bigger longer.
A 2021 report from Experian – the Q3 State of the Automotive Finance Market – just highlighted all the horrific facts. Here are some of the most disturbing statistics:
- In Q3 2021, the average new vehicle loan amount was $37,280 compared to $34,682 in Q3 2020.
- For the same quarter, the median new vehicle payment was $606, up from $565 in the third quarter of 2020.
- In the same quarter, the average term of a new car loan was 69.47 months. That’s actually shorter than 2020, when the average loan term was 69.64 months. But that’s almost 6 years away!
All in all, we’re borrowing more than ever and spreading the payments out as long as possible. Remember that Average New car loan took more than 69 months in Q3 2021, but that’s the average. There are also plenty of 84-month car loans that give people a soul-crushing car payment for seven full years.
With that in mind, you might be wondering if now is a good time to change the way we treat auto loans or refinance your auto loan to get a better deal. There are many scenarios when refinancing makes sense, but there are still times when it’s best to stick with whatever car loan you have.
When to refinance your car loan
There are four main reasons you should consider refinancing your car loan, and more than one can be applied for at the same time.
Your credit score has improved dramatically since you bought the car
If you had bad credit when you originally bought your car, refinancing now could help you save on interest or pay off your car faster. That’s because the interest rate you can qualify for is, for the most part, closely tied to your credit rating.
According to Bankrate, people with credit scores in the 300 to 500 range were paying an average APR of 12.99% on their auto loans at last count, while those with ratings of 501 to 600 were paying an average APR of 9.92%. On the other hand, people with fair to excellent credit ratings or ratings of 601 to 850 paid APRs ranging from 6.32% all the way down to 2.58%.
If your credit score was bad when you bought the car, but your score is now well above 600, refinancing your car loan could be a financially smart move.
Interest rates have gone down since you originally financed the vehicle
Maybe your credit score is about the same as it was a few years ago. In that case, it’s still possible to take advantage of lower auto loan rates available today.
For example, the Experian study showed that the average APR on new car loans was 5.38% in 2019, then fell to 4.23% in 2020 and 4.05% in 2021. If you check interest rates today, they’re lower than they used to be. If you took out your car loan a few years ago, a refinance could make sense.
You want to pay off your car faster
If you want to pay off your car loan faster, refinancing into a new loan with a shorter repayment period could put you on the right track. This is especially true if your current car loan is one of the longer ones at up to 84 months.
Of course not have to Refinance your car loan to pay off your car faster. Assuming your current loan doesn’t have a prepayment penalty, which it shouldn’t, you can pay more than the minimum loan requirement on your car and get the same thing.
You need a more affordable monthly payment
Maybe you need a cheaper monthly payment than you have now. In this case, refinancing into a new car loan with a longer repayment period, a lower interest rate, or both could help you achieve that goal.
Just remember that extending your repayment period will keep you in debt for a lot longer. You could also pay a lot more interest as a result.
Refinancing your car loan: what to look out for
While any of the reasons above could make refinancing your car loan a good deal, there are some serious pitfalls to watch out for. For example, you need to be aware of fees associated with refinancing, including prepayment penalties on your existing car loan and fees associated with the new car loan you are considering.
While most car loans don’t have upfront fees, you should still read your loan agreement for verification. In the meantime, you should also compare new auto loans to look for options that don’t charge origination or application fees.
Also, keep in mind that refinancing your car loan to extend the term can come with both pros and cons. For example, you can get a lower monthly payment, but you can pay off your car loan for much longer than you wanted.
You should also consider whether refinancing your car loan is worth it. If you don’t owe much and can afford to pay more than the minimum, you can give up your car loan faster by making higher monthly payments instead.
The final result
Does refinancing your car loan make sense? For most people, the answer to that question is a solid “maybe.” At the end of the day, it really depends on what you gain from the refinance.
For example, could refinancing help you save time, money, or both? Perhaps you could get a lower monthly payment that better fits your current income and bills. Consider playing around with a car loan payment calculator to find out for sure.