How Does a Vehicle Refinance Work?

You might already be familiar with the process of financing a vehicle loan: Once you apply for a loan, you have to get your credit pulled, get approved for the loan, agree to an interest rate, decide on your loan term, and so on. But what's the difference between financing and refinancing a loan? Learn about the what, why, where, and when of refinancing below.

What?

A refinance or “refi” is essentially the process of redoing a loan that you've already financed. Once you take out a loan, you're bound by its contract, including the interest rate, the term, who the co-borrowers or cosigners are (if any), and so on. If you need or want any of these things to change, you’ll have to refinance or “redo” the loan and agree to a new loan contract.

Why?

The majority of car owners who refinance do so in order to save money. For example, imagine you take out a car loan at your credit union. You’re approved for an interest rate of 5.50% APR, but interest rates drop after you’ve had the car for a while. Additionally, your financial situation has improved since you initially financed the loan. With these changes, you could qualify for a lower interest rate of 3.00% APR at the same credit union. To save money on interest, you choose to refinance the loan at the same credit union to get the better rate.

Other reasons to refinance can include:

• You need to add or remove a co-borrower or cosigner from the loan.
• You’d like to extend the length of your loan term in order to lower your monthly payments.
• Your credit score has improved and you can qualify for a better interest rate.
• You’re dissatisfied with your current lender and want to switch loan providers.

While most people refinance to save money, there are some situations where refinancing can actually end up costing you more. For instance, refinancing to remove a co-borrower could mean you won’t qualify for as good of a rate as before. And refinancing to extend your loan term could lower your monthly payments, but you could also end up with a higher interest rate.

Where?

If you're interested in refinancing, you can check with your current loan provider to see if they can give you a better deal than the one you originally got with them. This is a good option if you want to make the process as simple as possible. But what if you find a better deal at a different lender? That’s okay too! Simply contact the other credit union or bank and tell them you'd like to move your car loan from your current financial institution to theirs. They'll let you know what to do from there.

If your lender is a dealership, check the loan contract and speak with the dealer to see what their policies are on refinancing.

Regardless of who your loan provider is, see if you can negotiate with them before refinancing elsewhere. Ask if they’re able to offer you a better deal or match a rate from another lender.

When?

Even though you can refinance whenever you'd like, it's recommended that you wait at least six months from the time you originally took out the loan. This way, your credit score can recover from being pulled and you can establish some payment history. Also consider how much is owed on the car loan. If you're upside down (i.e., you owe more than the car is worth), it can be more difficult to find a lender willing to refinance with you. On the flip side, you're more likely to get favorable terms if the car is worth more than you owe on it.

Takeaway

Refinancing your auto loan can be a strategic move, offering the chance to adjust terms, improve interest rates, or make other changes that align with your current financial situation. Whether you're looking to save money, remove a co-borrower, or switch lenders, refinancing gives you options to potentially make your loan work better for you. Just remember to weigh the pros and cons carefully, consider timing, and shop around for the best rates.