A Complete Guide to Auto Loan Refinancing

Refinancing an auto loan involves replacing your old auto loan with a new one to get a lower interest rate or shorter loan term. It’s often used to manage debts more quickly and efficiently and, in some cases, even save money. To successfully manage your auto loan, it’s crucial that you understand what auto loan refinancing is, how it works and how it could benefit you.

When you refinance an auto loan, you replace your existing loan with a new one to make payments more manageable or to tackle debt sooner. That said, when refinancing auto loans, it’s important to ensure you’re securing a lower interest rate, shorter terms or more affordable monthly payments. Two options to refinance auto loans include traditional and cash back refinancing.

Like most loan products, auto loan refinancing options come with eligibility requirements. Lenders will look at your creditworthiness and use that to determine your interest rate and terms. If your credit score hasn’t improved since you first took out your original loan, you might not qualify for more favorable loan terms. If you do qualify, you can look for options amongst different banks and online lenders.

Refinancing an auto loan comes in two basic forms: traditional and cash-out.

Traditional refinancing entails getting a new loan with a lower interest rate or better terms to pay off the old one. Cash-out — also referred to as “cash back” — refinancing includes borrowing against your vehicle's equity in exchange for a lump sum.

Both options suit different applicants. To avoid problems and maximize savings, borrowers should choose an auto refinancing solution that meets their needs and financial circumstances.

Traditional auto loan refinancing involves taking out a new auto loan to pay off the remaining balance of your old one. It’s often done to secure better loan conditions, such as a lower interest rate, smaller monthly payment or a shorter or longer loan term.

If your credit score has improved since you first took out your auto loan, you’re likely the ideal candidate for auto loan refinancing. Most banks and online lenders offer this financial product to make debt more manageable, and if your credit score has improved, you’re likely to be offered better terms.

For instance, if you have a $20,000 auto loan with a 10% interest rate and a 60-month term, and your credit score has improved by at least 50 points, you may consider refinancing. If you have a remaining balance of $10,000 and qualify for the exact balance with a 60-month term and 8% interest, you’ll end up paying $582 less.

Cash back refinancing allows you to refinance your loan and receive a lump sum of cash based on your car’s equity. For instance, if you only owe $10,000 left for your vehicle, but it appraises for $15,000, the extra $5,000 is your equity.

To get a cash back refinance loan, lenders will look at your credit score and have certain conditions for your car, especially since it secures your loan. For instance, you may be required to have a certain number of miles on your vehicle, or it must be no older than a threshold age.

Opting for cash back refinancing is an option you can consider if you want to get better conditions on your auto loan and need cash to pay for something else, such as a repair for your car or home. However, it’s essential to be wary of cash back refinancing since it increases your debt, while traditional refinancing only focuses on your existing balance.

Refinancing your auto loan can be a great idea — but only in certain situations. Understanding when auto loan refinancing can be helpful is key to ensuring you make informed decisions.

Haphazardly refinancing your auto loan could lead to more debt, which can be challenging to manage if you’re looking for a reprieve. Thus, it’s crucial to carefully weigh the benefits and drawbacks of auto loan refinancing before making a decision.

Beyond refinancing your auto loan, there are other alternatives you can opt for that may suit your situation better. Understanding all your options can help you choose the solution that can best help you manage your auto loan.

• Home Equity Line of Credit
  Home equity lines of credit, or HELOCs, allow you to borrow against the equity in your home. HELOCs are a revolving line of credit, which means they act like a credit card — you pay interest only on the amounts you borrow, up to a limited amount depending on your equity. A HELOC is a good alternative to auto loan refinancing since you’re likely to get lower rates than standard loan options because it's a secured loan.
  
  However, unlike credit cards, you can only draw on a HELOC for a specific period of time, depending on the lender. For instance, you can borrow money during a three- or five-year period before your repayment period kicks in, which can last anywhere from ten to thirty years.
  
  
• Peer-to-Peer Loan
  A peer-to-peer loan lets you borrow funds from multiple people, who receive a portion of the interest you pay depending on how much they contributed to it. It’s available on platforms like LendingTree or Prosper, where the site itself sets the rates and terms based on your creditworthiness and other details.
  
  With a peer-to-peer loan, you can use the funds for more than just auto loan refinancing and borrow extra to pay for other necessary expenses. This is a good option if you have bad credit, as it might be easier to qualify for than a traditional loan. However, you’re still likely to get a better interest rate and loan terms if your credit is good.
  
  
• Vehicle Trading
  If you’re looking to refinance your auto loan because you can no longer meet your payment obligations, you might consider vehicle trading instead. This allows you to trade your car into a dealership and get the best possible price — ideally, one that can cover your remaining balance on the loan. If you get a little extra, you can even use that for the down payment on your next car.
  However, vehicle trading can be tricky. Dealerships often want to offer the lowest possible price when you trade in your car, as this allows them to profit when they sell it off.
  
  
• Selling Your Vehicle
  If you want to get the highest possible price to repay your loan and get some extra, you may consider selling your car entirely. This removes the challenge of repaying an auto loan but also leaves you without a private vehicle. Selling your vehicle should only be considered if you are truly unable to repay your loan.

Auto loan refinancing can make debt management easier — but only if it’s done wisely. Learn more about the ins and outs of refinancing your auto loan with our frequently asked questions.