Owning a car can provide many benefits, but buying one can be expensive. Many buyers choose to finance a new car instead of paying the entire cost in cash at the time of purchase. This allows them to spread out the costs over an extended period of time, so they can get the vehicle when they need it and pay for it through a manageable structure.
If you currently finance your vehicle, you may be wondering, “Should I refinance my car?” Auto loan refinancing may provide an opportunity to get a better financing agreement. Learning about the pros and cons of car loan refinancing, and the situations in which it may be most beneficial can help you make a more informed decision about refinancing.
Why Do Car Owners Choose to Refinance?
If you are considering refinancing your car loan, it can be beneficial to understand why a car owner may choose to do so. Key benefits of refinancing a car loan include:
- Capitalizing on favorable interest rates: The rates on car loans are often subject to larger market forces that can change over time. If market conditions have improved since your initial car loan or last refinance, you may be able to take advantage of these improved conditions to find a better interest rate.
- Leveraging equity: As you make payments towards your car loan, you build equity in the vehicle. You may choose to use this equity for refinancing to obtain the money you need in the short-term in exchange for expanding your long-term car payments.
- Easing financial burdens: If you’re struggling to keep up with your car payments, refinancing may be the ideal solution. By refinancing your car loan you can find more favorable terms to help you manage difficult financial times.
When May It Be Right to Refinance My Car?
Understanding situations in which automotive refinancing is ideal may help you determine if now is the right time for you to refinance your car. Considerations that may encourage you to move forward with refinancing include:
- When interest rates decline: If average interest rates have dropped since you initially financed your vehicle, refinancing may help you save money. You can capitalize on lower rates to reduce the interest you pay over the course of your loan, decreasing your total spending.
- When you improve your credit: Your credit score is often a significant factor when a financial institution determines the rate on your loan. A higher credit score can help you earn more beneficial rates, and it may be worth considering refinancing if you have significantly improved your credit score.
- If your income increases: Another consideration a financial institution may take into account is your income. As with your credit score, raising your income may help you lower your interest rate and make refinancing worth considering.
- When you have positive equity: Positive equity occurs when the current value of your vehicle exceeds the amount remaining on your loan. If you have positive equity on your vehicle, you may be able to get a more-favorable offer by refinancing.
- If you receive a promotional offer: Financing companies often compete with each other to acquire clients and will provide special offers to potential customers to incentivize refinancing. When receiving a promotional offer, compare its cost to your current loan agreement to determine which is the better opportunity.
- During a consolidation: If you have multiple lines of credit open, you may consider a debt consolidation plan. Refinancing your vehicle as part of a consolidation plan may allow you to lower your overall interest payments to save money.
- If you have financial strain: When your debt obligations are causing you financial distress, a refinancing plan may be the solution. By reaching a new financing agreement that extends the length of the loan in exchange for lower monthly payments, you can free up funds for other spending.
If one or more of these options aligns with your current situation, you may answer “yes” to the question “Should I refinance my car?”
Why May I Choose Not to Refinance?
Although refinancing a car loan can be a fantastic opportunity under the right circumstances, it’s not always the best decision. Keep these considerations in mind to determine if you may be better off continuing with your current loan agreement:
- If it doesn’t justify the fees: When entering into a refinancing agreement, it’s important to understand any associated fees, including both for your new loan as well as for the early exit from your previous loan. If one or both include fees, compare their costs to the projected savings under the new financing agreement to determine whether it’s a beneficial opportunity.
- If it leaves you underwater: Refinancing to lower payments may come with an extension of the loan term, which may raise your overall costs. When this occurs, compare how much it would currently cost you to pay off the loan to the vehicle’s value, and then to the expected cost of the refinancing plan. If your car’s value exceeds the cost of your current plan but is less than your proposed refinancing cost, you may prefer not to refinance so that you can keep your vehicle’s positive equity.
- If an extended term raises costs: Although raising your overall costs in exchange for lower short-term spending may be beneficial in some situations, it’s important to check both your expected total spending under refinancing and your current arrangement. If refinancing increases your overall spending, it’s important to weigh that cost against the benefits of lowering your short-term burdens.
Refinancing has the potential to help you save significantly or change your current spending to more comfortable levels. When you assess any refinancing offer and consider its positive and negative changes to your financial situation, you may discover that refinancing your loan is the best option. By doing your research and comparing your options, you can determine if you should refinance your car or stick with your current loan agreement, as well as find the best deal if you choose to refinance.

At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.