If you started an auto loan with a higher interest rate than you would’ve liked, then you may be able to change it! If your car loan, your credit score, and vehicle can meet some requirements, you may be able to qualify for refinancing and lower your interest rate to save cash.
How to Lower Your Car Loan Interest Rate
If you want to lower your interest rate in the middle of your auto loan, then look into refinancing. Refinancing is when you replace your current car loan with another one, and the goal is to do this with more favorable terms that can lower your vehicle payments.
Most borrowers refinance to save money during their loan term, or to make their payments more manageable. They often look for another lender to refinance their auto loan.
Borrowers who take out bad credit car loans are commonly assigned higher interest rates due to the lower credit scores they have. However, if you’ve been managing the auto loan well and improved your credit score since the start of it, then you may qualify for refinancing and you could change your interest rate.
Benefits of Lowering Your Interest Rate
If you can qualify for refinancing and lower your interest rate, your wallet will thank you later!
Interest charges can add up quickly, especially if you have a high loan balance, a high interest rate, and a longer loan term. Some borrowers find themselves only qualifying for interest rates in the double digits, but if you work hard and repair your credit, qualifying for refinancing could be in your future.
Here’s a quick example of how much your interest rate can impact your overall cost:
Say you financed your vehicle with a 15% interest rate with a loan amount of $10,000 for 60 months. During those five years, you’re estimated to pay around $4,274 in interest charges.
Now, if you refinance after one year to an interest rate of 10%, you’re saving $983. That’s almost $1,000 back in your pocket, that you didn’t have to shell out to your auto lender.
How Do You Refinance an Auto Loan?
To refinance, you can either work with your current lender, or find another one that can approve you. Your old car loan gets paid off by the new lender, and you sign a new loan contract and continue paying on your vehicle with the new terms and conditions.
Refinancing works like this: lower your interest rate or extend your loan term.
If your goal is to save cash throughout your loan term, you should opt to try and qualify for a lower interest rate. Refinancing to a lower interest rate lowers your monthly payment and saves you in interest charges overall.
Your second option in refinancing is typically to stretch your loan term. This also decreases your monthly payment amount, but it won't save you money in the long run. Adding time to your loan without qualifying for a lower interest rate just makes you accrue more interest charges for longer, meaning your loan becomes more expensive overall.
Since auto loans are almost always simple interest loans, you’re charged interest on the remaining balance of your loan – the more payments you have left, the more you’re going to pay. Sometimes, it may be a good idea to extend your loan term if your car payments are becoming unmanageable. If you can comfortably afford your payment, it’s advised to not extend your loan term if you can help it.
To refinance your auto loan and aim to lower your interest rate, the biggest thing a refinancing lender is going to check is your credit score. If your credit score hasn’t improved since you first got the loan, then you’re better off waiting a little while until it’s repaired some. The better your credit score, the more of a chance you have at qualifying for a lower interest rate.
Credit score isn't the only qualification for refinancing, though. Lenders vary, but you’re likely to be asked to meet the following requirements:
- You have a good or better credit score
- Your car loan is at least one year old
- Your vehicle has under 100,000 miles and is less than 10 years old
- You don’t have negative equity
- You don’t owe too little or too much so your loan amount fits the lender's stipulations
- You are, and have been, current on your loan payments
When you apply for refinancing, lenders require that you’ve handled the loan well, typically for at least one year. This means making your car payments on time, staying on top of your other finances, and improving your credit score.
Ready for Your Next Car Loan?
If you’re ready and gearing up for refinancing, then complete our auto loan refinance form. Our trusted partner will look for a refinancing lender in your area at no cost.
However, not everyone can qualify for refinancing. If you’re worried about being able to afford your vehicle payments, and refinancing was meant to be your solution, then it may be time to trade in your current car for something more affordable.
With bad credit, finding lenders that can work with you can feel impossible, or at the very least, a hassle. Instead of searching all over town for a dealer that has the resources you need, fill out our free auto loan request form.
Here at Auto Credit Express, we’ve created a network of special finance dealerships that stretches across the country. Start looking for the lending options you need without having to leave your house, since we’ll do the searching for you.