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If you’re paying an above-average rate on a car loan, perhaps because your credit was spotty when you originally financed the car or you simply signed on for a bad deal, now may be a good time to refinance.
As with the interest rates for new cars, these days you can find refinancing rates that are very attractive, 3 percent or lower. If you’re paying more than that, refinancing might shave hundreds, even thousands of dollars from the cost of your loan and reduce your monthly payment.
What’s more, unlike refinancing a mortgage, refinancing an auto loan involves no closing costs, appraisal fees, or other hoopla, says Greg McBride, chief financial analyst at Bankrate.com.
“If you are going to refinance, now is the time to do it, given that interest rates are rising,” McBride says.
How Much You Can Save
To see the potential savings, Michael Saccucci, Consumer Reports director of statistics, evaluated different refinancing scenarios. The refinancing rate you can get depends on many factors, including your credit score, your car’s age, and how long you’re refinancing for.
In one instance, using the lowest refinancing rate we could find—2.24 percent—Saccucci found that you could shave about $2,700 off the total cost of a six-year, 8 percent car loan after two years. And you’d cut your monthly payment by $56 for the remaining 48 months.
You can even benefit significantly if your current loan is charging less than 8 percent. If you refinanced a 6 percent loan, the total savings would be $1,712 and you’d reduce your monthly payment by almost $36. Even saving just 1 percentage point, from 3.24 percent to 2.24 percent, by refinancing would shave $436 off the cost of the loan and reduce your monthly payment by about $10, Saccucci found.
What to Do
Follow these tips if you think you might benefit from refinancing your car loan.
Ask your bank for a rate reduction. Your existing lender might lower the rate on your current loan if you push hard enough, McBride says. Lenders often won’t finance loans you initially got from them, but it’s worth a try.
Compare rates. Consumer Reports found a wide range of refinancing rates on lender websites, from 2.24 percent to as much as 4.63 percent. Remember that advertised rates typically apply only to customers with excellent credit, McClary says. If you’re behind on your current loan, your rates would probably be higher, or your finance application might not be approved, he says.
Check the fine print. Not all car loans qualify for refinancing. For instance, to refinance at Capital One your car must be no more than 7 years old. And the amount you owe on your loan must range from $7,500 to $40,000. Also check for any fees, McBride advises.
Look for prepayment penalties. Although the practice is rare, some lenders charge a prepayment penalty if you pay off your current loan early, which can reduce your savings if you refinance, McClary says.
Find out whether refinancing is worth it. Determine how much you might save by refinancing. If you’re already paying a low interest rate on your loan, less than 5 percent or so, you probably won’t benefit much, if at all, Saccucci says. There are several online calculators, including one from Bank of America and another from NerdWallet, that you can use to figure your savings.
Keep in mind that the calculator results are estimates. Your actual monthly payments will depend on your credit score and other factors. One thing to consider, McBride warns: Refinancing can temporarily lower your credit score, potentially raising your costs if you’re planning to apply for a mortgage anytime soon.
Don’t put it off. The earlier you refinance the more you’ll save on the cost of the loan. In the $30,000 loan example, refinancing an 8 percent loan to 2.24 percent in the third year instead of after 24 months would reduce the $2,700 savings by more than $1,100.
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2017, Consumer Reports, Inc.