Car Refinance: What The Process Means & When It Might (Or Might Not) Be A Good Idea

Having worked in car sales for a few years, I have been fortunate enough to dabble in all things car finance — from setting up new purchase and lease deals, through to repackaging old deals into new and more suitable deals for existing clients. With how fast technology moves in the car world, and how quickly people's individual circumstances change, it shouldn't come as a surprise to hear that many people look to refinance car loans every single year. Having repackaged countless finance deals over the years, there are a few pointers that everyone should know before looking to do the same. First, the basics:

Car refinancing is when you replace an existing car finance loan with a new loan from a separate lender. The main reason anyone looks to refinance a car is to secure a better deal with a lower interest rate, or more favorable terms. As personal circumstances change, the terms (rate, payments, and loan length) laid out in the initial agreement may no longer be suitable, and refinancing can be a useful tool to correct these otherwise fixed loan terms.

If your credit score has increased since you took car finance out, then lenders will usually be able to offer you a more favorable rate. Lower rates means more of your monthly payment comes off of the amount owed, and less is paid in interest to the lender.

Even if your credit score hasn't improved, you may be able to decrease the amount you pay in interest by switching to a car finance loan with a shorter term. Paying over fewer months will generally equate to less paid in interest. The regular payments will be higher, but more will come off of the total amount owed each month. If the higher payments are affordable, this can be a wise move. It might be easier to just overpay on your original agreement, but sometimes lenders will have hidden fees that penalize you for overpaying, in which case refinancing could still be a wise financial move.

Another great reason to refinance your auto loan is to add or remove a co-signer. A co-signer is someone who also takes legal responsibility for the debt, and as friendships and relationships change over the course of time, it may no longer make sense (or begin to make sense) to have that other individual on your car loan. 

It doesn't always make sense to refinance your current car loan, though, as there are many variables which can easily affect the attractiveness of replacement loans. If the following instances apply, then continuing with your current deal might be the better option — at least for the short term — until your circumstances change.

Negative equity is something many who look to refinance struggle with: This is when you owe more than the car is worth. In this instance, it can be difficult to secure a new loan, and even if you did, it's unlikely that the terms are going to be particularly favorable. If you can, look to pay yourself out of the negative equity before securing a new deal.

As cars age, they become more of a risk for the lenders, as older cars are typically more likely to fall into disrepair. Therefore, if your car is near or over 10 years old, the deals available will typically be less attractive, sporting higher interest rates, and possibly even additional admin charges, which help the lender to mitigate financial risk on their own behalf.

If your credit score has dropped since you purchased the vehicle, then the chances are refinancing is going to cost you more, as you would appear to lenders as a higher-risk customer. This will likely attract higher interest rates, shorter terms, and possibly even additional fees. The best action to take here is to build your credit score back up first, and then reconsider trying to refinance the auto loan once you're in a stronger financial position to do so.