When Joseph Kutz, a 27-year-old truck driver for Pepsi and part-time student in Alexandria, Virginia, bought a new car in 2020, he did what many car buyers do: He picked out his vehicle first and took the dealer’s offer of a loan rather than shop around. That's what led to Kutz researching auto refinancing.

It turned out he could have qualified for a lower interest rate and saved money on his payments. So, five months after buying a new Subaru hatchback, Kutz refinanced that auto loan through his credit union.

The rate on his 72-month loan dropped to 3.8 percent, from 5.35 percent, and his payment fell to $375 per month, from $440.

The dealer loan was convenient, but it turned out it wasn’t the best deal.

“I monitor my own credit score, and I knew my credit was good,” Kutz says. “After I bought my car, I talked to a few other people about their rates and found out my 5 percent was on the high end.”

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The Big Business of Auto Refinancing Loans

Americans held nearly $1.4 trillion in auto loans in the first quarter of 2021, according to the Federal Reserve Bank of New York. That makes auto loans the third largest category of debt for U.S. households, after mortgages ($10 trillion) and student loans ($1.6 trillion).

And cars, of course, are big-ticket items. The average new car cost $42,258 in June 2021, according to the Kelley Blue Book, which tracks automotive prices. With prices like that, car loans are a fact of life for many Americans.

A loan means that you are paying the price of the car, minus any down payment, plus interest over time.

The credit agency Experian tracks auto finance trends quarterly, and it says that in 2020, 85 percent of new cars and 36 percent of used cars were purchased with financing (a loan or a lease). And three- and four-year loans are largely a thing of the past; last year the average car loan initial repayment period reached a record 72 months, per Experian's findings.

You have the option to shop for financing before you buy a car, but most people don’t. Seven out of 10 auto loans are made through car dealerships as part of the purchase itself, according to the National Automobile Dealers Association.

The lender is typically either the manufacturer’s finance arm or a bank that has made arrangements to offer loans through the dealership.

Convenience is the main benefit of one-stop shopping — the downside is that you may not get the best deal if you don’t compare.

That’s why it’s always advisable to research car loans in advance and walk into the showroom with a pre-qualification letter in hand.

If you didn’t plan ahead, however, and you took the dealer financing, that doesn’t mean you’re stuck with what you got. You can still shop around and refinance if it makes financial sense.

Refinancing can free up cash flow to enable you to pay off the loan quicker or to pay down other debts. Auto refinancing may also make sense if your credit score has improved since you originally borrowed, or if interest rates have fallen.

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How to Get a Better Deal on Your Auto Refinancing Loan

The following tips, though not comprehensive, can set you on your way to getting a better deal on a car loan. The key is to look at a few options, make sure you understand terms and conditions, then decide what’s right for you.

  • Keep your goal in focus. Refinancing should enable you to bring down your interest rate, your monthly payment, or both. Don’t refinance unless it’s clearly a better deal.
  • Compare notes. One way of gathering information is to ask friends and family about their own borrowing experiences. It was Joseph Kutz’s mother, Diane, who urged him to replace his original loan. “I had told him how easy it was to join my credit union so he could refinance,” says Diane, a piano teacher in Cessna Park, Illinois. “I had researched and I knew that they had better rates than he was paying.”
  • Ensure refinancing is an option. Refinancing terms probably aren’t going to be favorable if your existing loan has a prepayment penalty, if you’ve fallen behind on payments, or if you are “underwater” on your loan — that is, you owe more than the car is worth. A car loan reflects both your credit rating and the value of the collateral — that is, the car itself.  
  • Check your credit report before applying. You can get a free copy of your credit report annually from each of the three nationwide credit reporting agencies through Annual Credit Report. It is prudent to check your credit report for errors and dispute any errors that you may find.
  • Take enough time to make a good choice, but don’t linger. There are two good reasons to do your loan comparison shopping in a short period of time. First, cars are depreciating assets, and the sooner you look into refinancing, the more value your vehicle should have, which will make getting a new loan easier. Second, when you apply for a loan and the lender checks your credit, a credit score is generated. Multiple credit checks from lenders in a short period of time — typically over 14 to 45 days, according to the Consumer Financial Protection Bureau — will count as only one credit inquiry, and one inquiry is better for your credit score than multiple inquiries.
  • Avoid extending the length of the loan. A longer loan term means lower monthly payments — but it also means more payments and more interest. Kutz was offered a 72-month loan to replace the one he’d already begun paying on, but he decided to pick right up where he left off. “Borrowing over a longer period would have lowered my payment even more, but I didn’t want to give up the progress I’d made,” he said.
  • Ask questions. You have every right to expect a lender to explain exactly how auto refinancing works. You should know what your annual percentage rate and monthly payment would be, and how the new numbers compare to the loan you have. You should also find out any fees such as loan origination fees, and any prepayment or other penalties that you may incur, and factor them into your decision. And don’t be reluctant to negotiate for more favorable terms.

The Bottom Line

Above all, remember, your mileage may vary. And the decision that turned out to be the best for your friend may not be the best for you, because your creditworthiness depends on the particulars of your unique financial situation.

Consider what multiple lenders have to offer to make sure you’re getting the best deal for your circumstances, and don’t hesitate to ask your existing lender if they can do better by you.

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