Reasons to consider refinancing your auto loan with a personal loan

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In a Nutshell

If you’re stuck with a high-interest auto loan because of bad credit, you may have some options for paying it off and saving money. Refinancing into another auto loan may be one such solution — but it’s not the only one. You may also be able to use a personal loan to pay off the balance.

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If you have an auto loan that you got when you had bad credit, refinancing your loan could save you money and lower your monthly payment.

But instead of addressing your bad credit auto loan by refinancing it into a new auto loan, it might be worth considering a personal loan to pay off this high-interest debt. Personal loans can offer more flexibility than auto loans.

Whether a personal loan or auto loan is your best refinance option can depend on your current credit and financial situation. Read on to learn more about how a personal loan might help you.


3 ways personal loans can differ from auto loans

If you’re looking at both personal loans and auto loans to refinance your high-interest auto loan, understanding the differences can help you make the right decision for you. Here are three key differences to know.

1. Uses

Refinancing your auto loan is designed to pay off your existing auto loan. Typically, you can’t use the loan proceeds for anything else. Also, the lender will typically pay off your current loan directly rather than send you the money to pay it off.

With a personal loan, you can use your funds for just about anything, so you can probably use it to pay off your car loan. You’ll likely receive the funds directly, and you can apply for more than you need to pay off the car loan and use any additional cash you borrowed for other things you need. But you shouldn’t take out a larger loan amount unless you really need the money for something else.

What’s more, some auto refinancing lenders may not refinance a vehicle if the mileage is too high or may charge more to do so. Others may not make refinance loans for certain makes or models of vehicles. These factors aren’t likely to affect whether you can qualify for a personal loan.

2. Collateral

Similar to typical auto loans, your new refinanced auto loan is typically secured by your vehicle. But if you qualify for an unsecured personal loan, there’s no collateral required to back the loan.

There are some secured personal loans you can get approved for, but they typically don’t require vehicles as collateral. Instead, they may require that you use another form of collateral to secure the loan, such as a savings account or certificate of deposit.

3. Costs

Because auto loans are typically secured by collateral in case you default, refinancing your auto loan may offer a lower interest rate than an unsecured personal loan.

As an example, Experian found in early 2018 that the average auto loan interest rate for borrowers with very poor credit was nearly 20%. Some personal loan lenders, however, charge interest rates around 30% or more.

That said, it’s not impossible that your interest rate could be lower with a personal loan than from refinancing your auto loan. That’s why you should shop around and compare loans from different lenders to find the best deal for you.

As for fees, if you refinance your auto loan you may be charged fees for terminating your old loan and setting up your new loan. Some personal lenders charge an origination fee to process your loan, but some lenders don’t.

3 times to consider a personal loan over auto loan refinancing

If you’re looking to get out from under a high-interest auto loan, here are three situations where it might make sense to consider a personal loan to pay it off instead of refinancing.

1. If you qualify for a better interest rate

If your credit has improved significantly since you first took out your auto loan, you may be able to secure a lower interest rate. Generally, the better your credit, the lower the interest rate. If you shop around and find you can secure a lower interest rate with a personal loan than through refinancing your auto loan, that could be the better bet. A lower rate could lower your monthly payment and save you money over the life of the loan.

Check your scores and then shop around, comparing several personal loan companies to see what kind of rates they can offer. But make sure to compare those to the rates you qualify for if you were to refinance your auto loan as well.

If your credit scores haven’t improved much, you may still be able to get a personal loan with bad credit. But it might be tough to get approved for a loan with a reasonable interest rate.

2. If you’re underwater with your auto loan

If you owe more on your auto loan than your vehicle is worth, you may not get enough money from refinancing your auto loan to pay off your existing loan. Or you may have a difficult time finding someone willing to refinance your loan, especially if it’s for an older vehicle.

That’s because when refinancing your auto loan, the value of the vehicle can be a factor in the loan.

How to get out of a car loan when you’re upside down

With a personal loan, the loan amount you qualify for isn’t tied to the value of your car, so you may be able to borrow enough to pay off your existing auto loan.

3. If you want to own your vehicle outright

If you use a personal loan to pay off your auto loan, the auto lender should transfer you the title for your vehicle, giving you full ownership.

If you refinance your existing auto loan with a new auto loan, however, the existing lender will transfer the title to the new lender. Your vehicle generally serves as collateral for the new loan until you pay it off.


Bottom line

If you’re looking to pay off a high-interest auto loan, you can choose to refinance it with a new auto loan. But depending on your situation and goals, it may make more sense to pay it off with a personal loan.

As with any loan decision, it’s essential to do your research and consider all your options carefully. The more you know, the easier it can be to pick the loan option that can save you the most money over time.