Should you refinance your car loan?

Car buyers will often go round and round with a dealer over a few hundred dollars on the price of the vehicle, all the while overlooking the fact that a poor financing decision could cost them thousands of dollars in interest over the long term. But, don’t worry, all is not lost.

Most people know that they can save money by refinancing their mortgage, but some research suggests that through refinancing auto loans, Americans could reduce their existing loan rate up to 2%, lowering their payments each month and saving them thousands on interest. Simply put, auto loan refinancing replaces your current loan with a new loan, with the option to keep your current loan term or change the term by extending or shortening it.

Really, there are two big questions you need answers to: Should I refinance my car loan? And how do I refinance my car loan? We’re here to help with your auto loan refinance.

Should I refinance my car loan?

First, answer these questions: do you have a new job, more cash flow, and/or have you improved your credit score so that it's healthier than when you first financed your vehicle? Check your credit report to be sure that your credit score has improved. Those factors could mean that you will qualify for a lower auto loan rate now, which will help save you hundreds or even thousands in interest over the life of your loan.

Next, check your current auto loan rate and see how it stacks up in today’s climate. It's a good idea to compare your current rate with refinancing rates that your primary bank or credit union is offering. They’ll be eager to keep your business and will give you the best rate they can, plus there could be relationship discounts that you may qualify for. You can also do online research to see how rates from some large, national lenders compare to your current rate.

Then do the math on your potential savings. Alliant Credit Union actually provides an online auto loan calculator that makes it easy for people to see how much they could save through Alliant’s auto loan refinancing options.

How do I refinance my car loan?

Once you decide that refinancing your car loan makes sense for you, shop around for the best rate. Again, it’s always good to start your search with your primary financial institution to see what auto loan refinancing rates they’re offering. When you’re ready, apply for a refinance loan with a lender you trust to get a firm rate quote. 

In addition to finding a good rate, pay attention to things like prepayment penalties, your monthly payment and loan terms. For example, Alliant has no prepayment penalties for paying your loan off early and same-day approval to help make refinancing auto loans easy. Alliant’s best rates are also fixed for 60 months, while many other lenders’ best rates are only good for 36 months and increase for longer terms. Consumers should be wary of rates that might seem low, but that only apply to shorter loan terms.

Also, evaluate your loan term, and whether you want to keep it unchanged, extend it or shorten it. Maybe you recently received a raise and have more cash flow, so you can pay off your loan more quickly -- which ultimately will help you save money in interest in the long run.

Then, all that’s left to do is complete the application and sign the necessary documents to create your new loan, at a new interest rate, with the term you choose. Your new lender will pay off your old loan, and you can start making payments on your new loan right away.

Check out these other money tips:

• Tips to pay off car loans early – and your other loans too
• When should you refinance a loan?
• How is a car loan calculated?

Maggie Tomasek is a marketing manager at Alliant. She began her career as a journalist for newspapers in Utica, N.Y., Des Moines and Cincinnati before moving to Chicago in 2009. Maggie is an eight-time Chicago Marathon finisher and a lifelong creative writer with a passion for comedy. Her mom instilled in her a great sense of fiscal responsibility, and her big sister told her to throw that responsibility out the window every once in a while in the name of life experience. So far, that combination of financial advice has worked out pretty well for her.