4 Reasons to Refinance Your Auto Loan

Along with just about everything else, cars have gotten extremely expensive, and these last few pandemic years haven't been a great time to buy one. This is especially true if you've had to finance a car purchase via an auto loan. In fact, a report from Edmunds noted that 15.7% of consumers who financed a new car in Q4 2022 committed to payments of at least $1,000 per month -- ouch!

The good news is that you may be able to refinance your loan. Here are a few reasons you might want to consider doing just that.

1. Your payments are uncomfortably high

If you got stuck with one of those recent auto loans that came with $1,000-plus payments every month, you may be excited at the prospect of refinancing to bring that payment down. And if you're having trouble affording your car payments, the main thing NOT to do is to tread water and pretend all is fine. The consequences of not paying your auto loan can be dire, after all. So reach out to your existing lender or perhaps some of the best personal loan lenders out there, compare your offers, and get the refinance ball rolling, sooner rather than later.

2. Your credit has improved

Perhaps your credit score has taken a turn for the better since you signed on for your car loan. If your FICO® Score was in, say, the "fair" range before, and you've paid off some debt, corrected errors on your credit report, or added to your overall available credit via a new credit card, your score might now be up to "good" or "very good." A higher credit score can qualify you for a lower interest rate than you received when you got the car, lowering your payments.

3. You want to pay the car off sooner

Maybe you can actually afford a higher car payment every month (did you get a new job or otherwise increase your income? Well done!). If you can afford to make higher payments, you'll pay the car off sooner (and may also qualify for a lower interest rate, as you'll be less of a risk to the lender with a shorter repayment term).

4. You want to tap the equity in your car

Some lenders offer the chance to refinance your auto loan and actually take money out, in basically the car equivalent of a cash-out refinance for your mortgage loan. So if you're in need of money and have a lot already paid into your car loan, you may be able to do this. Weigh your options and intentions carefully if you're considering this option, however.

Cars don't appreciate in value the way homes often do, and taking on a cash-out refinance could leave you upside down on the car loan (meaning you owe more than it's worth). Being upside down isn't automatically a bad situation, especially if you intend to keep the car for the long term. But if you need to sell it and owe more than it's worth, you'd need to come up with the extra money beyond what you could get for it to pay off your lender.

If you know you can qualify for a lower interest rate and want to either make lower payments or potentially pay off your auto loan sooner than originally planned, it might be worth considering a refinance. Shop around for the best deal and enjoy the savings.