Refinance Auto Loan – How it Works

Is it possible to lower payments by refinancing a car loan?

refinance car loanRefinancing an auto loan can be a good way to reduce monthly payments. However, it often doesn’t bring the benefits that borrowers expect. Let’s take a look.

How auto refinancing works

A car refinance loan is no different than any other used-car loan. You determine the payoff balance on your old loan, arrange for a new loan, get a check from the bank or finance company to pay off the old loan, and begin your new loan. The new loan replaces the old.

A refinance loan does not have to come from the same bank, loan company, or finance company as the old loan.

It is possible that your auto loan company will be willing to modify the terms of your existing loan if you are in serious financial difficulty and need to lower your payments. This is unusual and should not be your only plan. Contact your bank or loan company to find out if this is possible in your case.

There are only two ways that refinancing a car loan can lower your monthly payments: 1) by lowering interest rate, and 2) by extending the payoff schedule, or both.

Will refinancing really help?

First make sure your refinancing expectations are realistic. What are your car loan payments now? Has your credit score improved since you began the loan? How much do you want to lower your payments? Are you currently upside down on your loan? Are you willing to extend your loan for a couple or more years?

Refinancing can reduce your car payments if there is a significant difference between your old interest rate and the rate that you might get now. The benefit is greatest if your old interest rate is very high – possibly because your credit score was low at the time, or you had unknowingly accepted a bad deal.

Auto loan rates have come down (as of this writing) over the last few years — possibly enough to make refinancing worthwhile. However, if you originally bought a brand new car and took advantage of a special loan rate at the time, you might actually find current rates higher. In that case, refinancing wouldn’t make sense.

If you are currently upside down on your present loan, you may not be able to refinance, especially if there is a large difference between what you owe and the value of your vehicle. Lenders don’t want to lend more than a car is worth. The only way around this problem is to use cash to make up the difference to pay off the old loan.

Lower your interest rate

“ What you pay for your car loan or lease directly depends on your credit score”

What's Your Credit Score?

The refinance interest rate that you’ll get is based on your credit score. If you don’t know your credit score or are not sure if your score has improved since your loan began, you should get it now. What’s your FICO score? Find out now when you check your credit report for $1 at!

If your score hasn’t improved, or improved very little, you may not qualify for the lowest interest rates. You may not be able to better your original rate. Check current loan rates with Auto Credit Express who specializes in refinance loans, especially for people who have had credit problems in the past.

If you have had poor credit, paying off bills and making on-time payments for a couple of years may improve your credit score a little but, depending on just how bad it was, your score may not have improved enough to make a difference in interest rates. The negative elements on your credit history stay on your report for 7-10 years and don’t go away even after you improve your credit habits. Many people are disappointed to learn that good credit habits take much longer to affect their credit score than does poor credit habits.

Extend your loan term (months)

If you can’t reduce your interest rate, another way you might benefit from auto loan refinancing is to extend your loan term. That is, extend the number of months that you’ll have to pay off the loan. It’s possible that your loan company will modify your existing loan rather than make you end one loan and begin another. This is not a great solution, but might help in a bad situation. Get a payment quote for an extended term loan at Auto Credit Express (see link above) to see if it helps. If not, you are not obligated to accept the loan.

In most cases extending a loan term is not a good idea because it almost always means that you will be upside down on the loan for almost the entire term. You will have no sell or trade equity until near the end of the loan. And you’ll still be paying on an old car for years to come, possibly after the car has turned into junk.

Let’s take a look at an example of how this might work.

Refinance Example

Following is a simple example of an actual calculation in which it is assumed the buyer decides to refinance his car after one year:

New-car loan – $30,000, 6% interest, 48 months. Months remaining – 36. Original ayment amount – $704.55

Balance owed after one year – $22,570.

Refinance loan – $22,570, 7% interest, 48 months. Refinanced payment amount – $540.47

This shows a monthly payment reduction of $164 but notice that we’ve extended the payment term out another year. Had we not extended the loan term, the payment would have been $697, a difference of only $7.

Also notice the interest rate on the used-car refinance loan is higher (because used-car rates are higher than new-car rates), which increases the payment amount. We could have extended the loan even further for an additional payment reduction, although that’s usually not a good idea.

You can do your own car loan refinance calculations with this online auto loan calculator.

Where to refinance your auto loan

Any lender or bank who grants used-car loans can refinance your old car loan. You could check with your bank or a credit union to determine if refinancing will benefit you, and get pre-qualified.

However, since it’s so easy and free, we recommend going to an online company such as Auto Credit Express and find out instantly if you qualify. If you like their offer, simply complete the paperwork and you have a new loan. The application process is free and there is no obligation. They work with people with bad credit, no credit, bankruptcies, and repossessions — and offer good rates.


If you’re thinking about refinancing your auto loan, make sure you do your homework and determine if it will reduce your payments enough to be worth doing. You have better chances if your credit score has improved significantly and you are not greatly upside down on your old loan.


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