This question comes from Alexandra from Pittsburgh!…
“Hey, guys, I have a quick question to ask you. I bought my car in 2022, and at the time I was rebuilding my credit.
Then I refinanced my loan a year later and I lowered my payment and I got a slightly better interest rate.
However, my credit’s gotten even better since! And I’m wondering, is there a way to negotiate interest rates after you refinanced with the bank? Or do you always have to refinance to lower the interest rate?
And how does this work with a vehicle that’s depreciating in value? This is a 2018 Chevy Cruise if that matters. Thanks!”
Matt & Joel’s response:
Great question, Alexandra!
You’re one of the rare folks who could actually benefit from refinancing right now. Mostly because it sounds like your credit has improved so much.
Rates have been on the rise which means refinancing makes sense for far fewer folks. So lenders will likely be happy to hear from you because their refinancing business has largely dried up.
But let’s get to the crux of your question: Can you lower your loan interest rate without refinancing?
Fixed car loan rates
The short answer is no. Once you qualify for and sign a car loan, you can’t just renegotiate the rate you have mid-term.
Rates have to be negotiated at the time you get the loan, or buy the car from the dealer. Once you’ve got a loan in place you’re not likely going to be able to go back and ask them to lower the interest rate moving forward.
But, you can refinance as much as you want. If it makes financial sense.
Car loans typically have fixed rates that don’t change. This is usually a good thing, because it gives the borrower a predictable monthly payment that doesn’t go up if interest rates rise.
Variable rate loans are an option, but they’re a little riskier. But even those don’t go up and down with your credit score. Variable rates are based on a prime or benchmark index rate – nothing within your control.
Refinancing options
If your credit score has drastically improved, chances are you’ll benefit from another refi!
One idea is to call your current lender to see if they have any incentives for you to refinance directly with them.
But even if they give you a good deal, it’s always best to shop around. Playing lenders off each other is a great negotiation tactic, and a surefire way to land at the best overall rate.
The best places to look for car loans are your local credit union, Capital One, or use a site like MyAutoLoan.com. They will shop rates around on your behalf which can save some time.
Refinancing fees
The good news is that when you’re refinancing an auto loan there aren’t typically massive junk fees attached. Unlike when you refi a mortgage.
But there are at least some fees involved, depending on the lender. This could be disguised as “prepayment fees” with your current lender, or “origination fees” with a new lender.
If there is a prepayment fee, that could be a reason to avoid refinancing. There’s no sense saving $800 in interest if it costs you $1000 in fees.
And if there’s an origination fee that a bank is charging for your refinance, that could be a reason to keep shopping around. Again, if the fees are greater than the savings it doesn’t make sense to refinance.
But if you can avoid those fees, which smart shoppers often can, there’s no harm and no foul to refinance your car loan when a better deal is available.
Car loan interest rates
Don’t just assume that your refinance rate will be lower based on your credit score improvements alone.
There are several factors that play into what interest rate you’ll be offered. Your credit score, current income, any new debts, age of vehicle, and current equity might weigh into the decision.
Older models, like your 2018 car, will likely come with a higher interest rate than what is offered to folks who are taking out a loan on newer models.
As for credit scores, there’s a pretty huge difference between low and high credit scores and the average car loan rates. Check out this chart from MarketWatch, using 2023 data from Experian…
As you can see, rebuilding your credit is crucial to qualify for lower car loan rates.
You mentioned the last time you refinanced that you were able to lower your payment. That’s cool, but it’s not the only thing you should prioritize.
Folks who refinance too regularly might find themselves lengthening that payback period. Meaning they’re underwater in that car for longer. You don’t want to put yourself in that position!
Car loan terms
We’d say that getting the lowest rate is more important, even if it means taking a shorter term. It also might mean increasing your monthly payment amount.
We want you out of debt and paying the least amount of interest overall. That is, of course, if you can financially handle it.
Car loans are considered “bad debt”. Because they are typically higher cost loans (8%+ interest rates) and they’re backed by depreciating assets.
Folks who pick 60 or 72 months loan terms are underwater for a long time. They pay the most in interest and it really stunts their ability to create wealth in life.
So, if possible, go with the shortest loan term you can stomach.
The Bottom Line:
The goal is to become car debt-free and hopefully to never have a car payment in your life ever again. And if refinancing can help you pay less interest and get rid of that debt faster, we are all for that!
We’re happy to hear you’re paying more attention to your credit score and that you’re seeing it grow! That will, of course, continue to give you access to better terms when borrowing.
But just because you can now snag a loan with a lower rate doesn’t mean you want to put more emphasis on borrowing. Most debt is still working against your ultimate goal of financial freedom. Cheers!
For the full version of this discussion, check out Podcast Episode #805 (it’s the 2nd question we answer in the episode)
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