'It's time to get in now' and refinance your auto loan, expert says: Drivers could save $100/month

Refinancing could also lower your interest rate.


It's a challenging time to buy a new-to-you car, with prices surging during the pandemic. But if you're making loan payments on a vehicle, it's possible you can capitalize on record-low interest rates and lower your monthly payments by refinancing your loan.

When you refinance a loan, you replace the original loan with a new one, usually to get a better interest rate or lower monthly payment.

The current average auto refinance interest rate of 5.51% is the lowest it's been all year, according to the auto loan website RateGenius' September 2021 Auto Refinance Rate Report. In August, the average driver who refinanced saw $102.62 in monthly savings.

"It's time to get in now," says Josh Sadlier, an editor at auto website Edmunds. The Federal Reserve is keeping interest rates low at the moment, but with the agency likely to start tapering emergency measures from the pandemic, it "likely won't be the case for much longer," Sadlier says. Some policymakers believe the first rate hike could come sometime in 2022.

Here's what you need to know about refinancing an auto loan.

Refinancing can make sense 'if you've been able to improve your credit score'

Whether or not you can save money by refinancing your auto loan depends on many factors, including your current rate and your credit score. If you didn't qualify for the best rate at the time you bought your car, but have boosted your credit score since, refinancing could save you money.

"Just as with a new loan, your credit score will determine the rate you pay," explains Matt DeLorenzo, senior managing editor for Kelley Blue Book. "The higher your score, the better risk you are, the lower the rate. The lower the score, the riskier the loan, so you will end up paying a higher rate. If you've been able to improve your credit score, it might be worth taking a look at refinancing."

The current average auto refinance interest rate for Americans with "poor" credit (580 and below per FICO) was 9.33%, according to RateGenius. Those with excellent credit (800 and above) got a 3.77% rate.

How this couple saved $1,500 buying a new car during the pandemic

Video by Stephen Parkhurst

When refinancing an auto loan doesn't make sense

Although it may be tempting, refinancing isn't right for everyone. Here are four times when refinancing might not work in your favor.

  • You just bought the car: Wait a while after buying your car before you try to refinance, experts say. Waiting at least six months gives your credit score some time to bounce back after any hard inquires from getting the original loan approved. Plus, lenders won't approve new financing if you currently owe more than the car is worth, which is a possibility if your original loan has a long term.
  • Your car isn't in great shape. Some lenders may limit financing to cars in good condition, with fewer than a set number of miles.
  • You're extending the repayment timeline: If your loan life extends, you'll ultimately end up paying more. "Even if you have a rate that lowers your car payment by extending the loan term," says DeLorenzo, "you may end up paying more in interest over the time you own the car. And when it's paid off, [you'll] have a car that's worth less than one that has been paid off early."
  • Your current loan carries exit costs: "Watch for penalties from your current lender. These can take a bite out of any savings with the new loan," Sadlier says. Additional charges can include transfer or exit costs incurred when you transfer from one loan provider to another.

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