Can You Refinance a Car Loan with a Different Bank? Learn about Your Refinancing Options.

Most people take out their car loan from a financial institution, which imposes set parameters for the length of the loan and the interest rate. As a borrower, you may ask "Can you refinance a car loan with a different bank?" or whether you need to stay with the same institution that issued the original loan. Either choice can give you the flexibility to take advantage of a loan with better terms and save money each month and over the life of the loan. This guide covers car loan basics and weighs the pros and cons of refinancing with a different bank.

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What Is a Car Loan?

A car loan is a financing agreement between a financial institution — the lender — and the car purchaser — the borrower. The borrower makes monthly payments to pay off the loan amount for the duration of the loan term. In the meantime, the lender uses the car as collateral to secure the loan until the eventual payoff.

Borrowers apply for auto loans to cover the out-the-door cost of their vehicle, which is the purchase price plus taxes and fees. They agree to make monthly payments of principal and interest in exchange for driving the vehicle. You can finance a car loan for a certain number of months, often between 24 and 84, giving you a consistent monthly payment amount to add to your monthly budget.

When you apply for a car loan, a financial institution will review your credit application and issue the terms of the loan if it approves it. The terms will include the principal amount borrowed, the interest rate, the repayment term length, and a monthly payment amount. If you have a higher credit score, the interest rate will be lower, meaning your monthly payment will be lower.

However, if you have a low credit score or limited credit history, the financial institution is likely to impose a higher interest rate, meaning you'll have a higher monthly payment for the length of the loan.

Once you have entered into a contractual agreement with a financial institution for an auto loan, you will need to make monthly payments to pay off the debt. Missing payments or defaulting on the auto loan can lead to serious credit issues and the repossession of the vehicle. Making car loan payments on time can help to build a strong credit profile that will make borrowing in the future an easy process.

Should your financial situation change, either positively or negatively, there are ways to create flexibility by refinancing an auto loan.

Refinancing in a Nutshell

At its core, refinancing is taking out a new loan on your existing vehicle to pay the existing loan off. This is ideal for taking advantage of lower interest rates, a longer term for payments, or a shorter term to pay off the car faster. Most of the time, a positive change in your credit score can help you secure a lower interest rate on a new car loan, leading to lower monthly payments and less interest paid over time. This can free up money each month for you to put toward other debts, or you can pay off your vehicle faster by paying additional money each month toward the loan's principal.

When refinancing, you are closing an account and opening a new one. This affects your credit but can also improve your financial situation. Moving from one lender to another can give you access to additional benefits, such as new credit opportunities or membership benefits, making refinancing even more rewarding.

When Should You Refinance a Car Loan?

Refinancing can help you take advantage of your improved credit, get out of a bad loan with terms that are not advantageous, and reduce the monthly payment for your car loan. The right time to refinance a loan will vary depending on several factors, including the following:

• Is the loan current? If you have not missed any payments on your auto loan, a lender will consider your account to be in good standing. Missed payments can negatively impact your credit score and your ability to qualify for a refinancing loan.

• Has your credit improved? You should only consider refinancing if there have been positive changes to your credit score, meaning you now qualify for better car loan terms and a lower interest rate.

• Can you get better terms? If you are strapped into a loan with an inflated interest rate or one with a co-signer with poor credit, refinancing can help save you money on your monthly payment and get a better interest rate. Adding a co-signer if there was not one on the original loan can also help you get better terms, particularly if the co-signer has a strong credit history.

• Do you have equity in your current loan? If a car is worth more than you have left on your loan, a cash-out refinance can give you access to that equity and all the benefits of a refinance. This can help you access cash for unexpected expenses or travel.

• Is there another incentive to refinance with your current lender? If you have a pre-existing relationship with a financial institution, it may offer an incentive program that makes refinancing with it an attractive proposition. Sometimes, a financial institution will offer better terms for longstanding customers or allow you to extend the life of your loan.