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The smart guide to refinancing your auto loan.

Love the benefits of having a car? There may even be more to love—refinancing your auto loan could save you money. But this savings option is often overlooked when shoring up personal finances. Ways refinancing your auto loan could help you include using the savings to pay off your balance faster, lower your monthly loan payment, and decrease the amount of interest you’ll pay.

Of course, everyone would like more money in their pocket. But there are some factors to consider before knowing if refinancing is the right solution for you. Read on to understand how the process of refinancing your auto loan works, along with some pros and cons.


What is auto refinancing?

Auto refinancing is when you renegotiate the terms of your auto loan. Since the original lender has no real reason to offer you better terms, it’s really up to you to go out there and shop around. “Refinancing is beneficial to borrowers since it can lower your monthly payments,” says Ruby Bilin, a Coast Capital relationship manager. “Your new lender would pay off your existing balance, and then they would lend you that amount at a lower interest rate.”

Another appealing aspect about auto refinancing is that there’s often no fee associated with switching lenders. That said, you do need to read the terms and conditions of your original contract to ensure there are no penalties for paying off your balance early. You’ll also want to check with your new lender to see if there are any additional fees.

How much can I save by refinancing my auto loan?

How much money you can save on the refinance depends on a few variables. “You’ll need to look at your outstanding balance, how much of the term you have left, and current interest rates,” says Bilin.

For example, let’s say your current auto loan has an outstanding balance of $20,000. There are 5 years (60 months) left on the term. You’re currently paying 6% interest, which works out to $386.66 a month that you’re paying.

Now let’s say you’ve found another lender who’s willing to offer you the same term, but they’ll give you an interest rate of 3.99%. How much would you save

Outstanding balance $20,000 $20,000
Months left 60 60
Interest rate 6% 3.99%
Monthly payment $386.66 $368.24
Total interest paid $3,199.36 $2,094.40


On a monthly basis, you would save $18.42. However, when you look at the savings over the term left, you’d be saving $1,104.96.

“Often people don’t bother with refinancing because the monthly difference appears to be minimal,” says Bilin. “However, when you factor in the remaining term, the savings could be significant.

What are the top reasons to refinance?

Although refinancing your auto loan can make a lot of financial sense—just for the savings alone—there are a variety of things to look at before you start shopping around. Bilin says to consider the following points:

  • Interest rates have dropped: Many people don’t realize that interest rates change all the time. If rates have decreased since you originally received your loan, it’s worth taking a look to see what’s currently available.
  • You want to lower your monthly payments: Refinancing your auto loan with a lower interest rate immediately puts money back into your wallet. You could use that money to help with your monthly expenses or put towards goals like repaying higher interest debts, home improvements, or an education fund.
  • Your credit has improved: One factor that determines your interest rate is your credit score. If your credit history wasn’t in the best shape when you applied for your auto loan, you may not have gotten the best rates. If your credit score has improved since then, it’s worth checking to see what rates you would qualify for now.
  • There’s no penalty to switch: If your current contract states that there are no fees for early repayment, you might as well shop around to see if you can get something better.

What are the mistakes to avoid when refinancing my auto loan?

Admittedly, many people get tempted to refinance because it can help them manage their budgets, but there can be downsides if you’re not careful.

“When refinancing your auto loan, you can extend your term. For example, you could go from 48 months to 72 months, if your vehicle qualifies for the longer term,” says Bilin. “While this can considerably lower your monthly payments, you’ll likely end up paying more interest over the longer term.”

Additionally, extending your term could potentially put your loan upside-down. That’s when you owe more than what your car is worth. If you ever wanted to get rid of your car later, you may not be able to get the full amount that you owe. That means you would have to pay off the balance with your own funds.

Also, moving ahead with refinancing could be problematic if there are reasons you may not qualify. “For instance, if you have late payments on your existing loan or you have an older vehicle or one with high mileage,” says Bilin, “which may not be appealing to the lender.” So be sure to review the terms on any potential new financing options before starting the process.

What are the steps to refinancing my auto loan?

So, you decided that you’re ready to refinance your auto loan, what comes next? The process is pretty straightforward, but there are a few items to get in order:

  1. Your existing loan: Gather up any information and paperwork about your existing loan. The easiest way to do this is to obtain a payout quote from your current lender.
  2. Your vehicle information: You’ll need to provide information about your car. The make, model, vehicle identification number, and any insurance claim or damage history.
  3. Your financial information: Prepare your personal documents. These could include identification, income verification, and paperwork related to any other debts that you may have.

If you have all of this information ready, you’ll be in a good position to speak with your potential lenders to find out what auto financing options they offer. The approval process is often quick and rates are competitive. In many instances, it takes only 10 minutes to fill out an online loan application. So there’s no reason to wait to find out what’s currently out there. In no time, you could be funnelling your newfound savings into other important goals.

Do you think you are paying too much in auto loan payments? Request a quote from the experts at Coast Capital.


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This article is provided for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, fees, and other investment factors are subject to change without notice, and Coast Capital Savings Federal Credit Union is not responsible for updating this information. All third-party sources are believed to be accurate and reliable as of the date of publication and Coast Capital Savings Federal Credit Union does not guarantee the accuracy or reliability of such sources. Readers should consult their own professional advisor for specific financial, investment, and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.

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