Refinancing a car loan can be a smart financial move that can help you save money — if you time it right. Whether you're looking to take advantage of lower interest rates, adapt to changes in your financial life or secure a better deal, refinancing might be the answer.

Here is what you should consider before you refinance your auto loan.

Three reasons to consider refinancing

These key moments are a great reason to consider refinancing your auto loan.

Rates have gone down

Interest rates can fluctuate and are influenced by a complex interplay of economic factors, including central bank policies, inflation, and overall market conditions. When interest rates are high, borrowing becomes costlier, and the monthly payments on loans, such as car loans, tend to be higher. On the other hand, when rates drop, borrowers gain an opportunity to secure loans at more favorable terms, making refinancing a compelling option.

If you've taken out a car loan when interest rates were high and noticed that rates have significantly dropped since then, it might be an excellent time to refinance. By refinancing to a lower interest rate, you can potentially reduce your monthly payments, decrease the total interest you'll pay over the life of the loan, and even pay off your loan sooner.

Your financial situation has changed

Life is full of changes, and your financial circumstances might not be the same as when you first obtained your car loan.

Your credit score reflects your creditworthiness and financial responsibility. A higher credit score often translates to access to lower interest rates. If you've seen a boost in your credit score since taking out your car loan, refinancing can help you secure a loan with a more favorable interest rate. A lower interest rate can directly impact your monthly payments, allowing you to save money in the long run.

You want a better deal

Sometimes, the terms of your current car loan might not be as favorable as those offered by other lenders. Whether you find a lender with better customer service, more flexible repayment options or a shorter loan term that aligns with your goals, refinancing can allow you to secure a better deal overall.

When you shouldn’t refinance

On the other hand, refinancing right now doesn’t always make sense. Consider this:

Shortly after getting a loan

In the early stages of a car loan, a significant portion of your monthly payment goes toward paying off the accrued interest rather than the principal balance. If you refinance during this period, you effectively "reset" the loan, causing you to restart the process of paying off interest before making substantial progress on the principal. This could lead to higher overall interest costs in the long run, potentially offsetting any savings you might gain from a lower interest rate.

If you have negative equity

Negative equity occurs when you owe more on your car loan than the current value of your vehicle. If your car has depreciated faster than you've been able to pay off the loan, you're in a negative equity situation. Refinancing under these circumstances can be challenging, as most lenders won't provide a new loan that exceeds the car's current value. Even if you find a lender willing to refinance, you might have to cover the difference between the car's value and the loan amount, making it financially unviable.

If your loan has prepayment penalties

Some car loans come with prepayment penalties, which are fees charged for paying off the loan early. These penalties are intended to compensate lenders for the interest they're missing out on due to early repayment. If your current loan carries prepayment penalties, refinancing might not be as financially advantageous as it seems. The prepayment penalties could negate any potential savings you'd gain from refinancing to a lower interest rate.

Considering a refinance?

Your partners at Spectrum Credit Union are here to help you navigate your auto loan refinance. We consider cars made within the previous two years with under 30,000 miles as “new” and offer special programs for older cars, so you aren’t penalized for taking good care of your ride. We’re here to help discuss your options and come up with the best refinancing option for you.