Car payments can eat up a huge chunk of your monthly budget. This is especially the case if you are stuck with a high interest rate or a loan that does not reflect your current financial situation. Thankfully, refinancing your auto loan might be the solution to bringing these payments down and freeing up some breathing room in your finances. You could save hundreds or thousands with the right strategy.

Know When Refinancing Makes Sense

Refinancing does not work for everyone, but it can pay off in some situations. You might be able to score a lower rate if interest rates have dropped since you first got your car loan. This can also happen if your credit score has improved.

You should also consider refinancing if your current monthly payments are too high and you are struggling to keep up. Extending the length of your loan can lower your monthly payment, although it may increase the total amount of interest you pay over time.

Check Your Credit Score First

Lenders will use your credit score to determine the interest rate they will offer you. So, knowing where you stand helps you set realistic expectations. You might qualify for better terms if your score has gone up since you took out your original loan. But you should consider waiting a bit and taking steps to improve it before refinancing if your score is low.

Compare Offers from Multiple Lenders

Reach out to your current lender first because they may be able to refinance your loan or offer new terms to keep your business. Then check with banks, credit unions, and online lenders to compare their offers.

You should look beyond the interest rate. Compare fees, loan terms, and the total cost of the loan. Some lenders charge origination or application fees, while others do not.

Know the Value of Your Car

Refinancing might not be a good option if your car is worth less than what you owe on your loan. Use Kelley Blue Book or Edmunds to estimate your car’s value. Lenders typically want the loan amount to be less than or equal to the car’s value.

Decide What You Want to Prioritize

Think about your financial goals when refinancing.  Consider if you want to lower your monthly payment to ease your monthly budget.  Perhaps you are looking to pay less in interest overall by shortening your loan term. You might want to extend the loan term If your goal is to lower your payment. But a shorter term with a lower rate could be a better choice if you want to pay off your loan faster and save on interest. Your choice depends on your financial situation and how long you plan to keep the car.

Watch for Prepayment Penalties

Some lenders charge you a fee for paying off your loan early, which could eat into the savings you would gain from refinancing. Make sure refinancing is favorable if there is a penalty. If not, it may be better to wait until the penalty no longer applies or negotiate a better refinance offer.

Get Prequalified Without Hurting Your Credit

Many lenders let you get prequalified with a soft credit check, which does not impact your credit score. This can give you an idea of what rates and terms you might qualify for without committing right away.

Getting prequalified also gives you a chance to compare offers without the pressure of a full application. The lender will run a hard credit check to finalize the approval once you are ready.