Refinancing your car loan can help you pay off the remaining balance on your current car loan, typically at a lower interest rate or with better terms that fit your personal finance goals.
If your credit score has improved and/or have gone down since you took out your first loan, you may qualify for better loan rates. Refinancing can provide many benefits: You may be able to decrease your monthly car loan payment and lower the amount of interest you pay over the life of the loan. You may even be able to change co-signers or delay your next car payment.
What is auto refinance?
Refinancing your car loan is very similar to refinancing your mortgage, but the underlying asset is your vehicle instead of your home.
When you refinance, a lender evaluates your credit history, your current loan terms and your vehicle, and determines if they can offer a better rate or loan terms than your current lender. If they can, they will pay off your current loan and assume the rest of the balance.
Should you consider refinancing your car loan?
Auto refinance allows potentially you to lower your current interest rate, pay off the loan more quickly, and/or decrease your monthly payments.
You could be a good candidate for auto refinancing if you:
- Pay relatively high interest on your auto loan
- Have a recent track record of making on-time payments
- Want to extend the term of your loan to lower your monthly payment
Auto refinance can help you:
- Lower the interest rate on your current auto loan
- Decrease your monthly car loan payment
- Reduce total interest you pay over the life of the loan
- Change parties listed on the loan (add someone, drop ex-spouse, etc.)
- Potentially delay your next car payment (if the lender allows it)
Step 1. Assess your current auto loan situation
Refinancing may not be the best financial decision for everyone. Assess your current auto loan situation to determine if refinancing your car loan makes sense for you.
To start, understand your current loan terms well so that you can easily compare them with other refinance offers. Here are some loan details to keep in mind:
Current monthly payments
If your car payments are stretching your budget and you’re struggling to make payments on time, you may want to consider a refinance. A lower monthly payment could be achieved with a lower interest rate and/or longer term.
Interest rate (APR)
Is the interest rate on your current auto loan too high? You may be able to qualify for an auto loan with a lower interest rate than your current one. With a lower interest rate, you may be able to pay less money overall during the term of your loan.
Pro Tip:
If you get a lower rate but choose to extend the auto loan term, the overall amount paid on the loan could be higher, which may not make financial sense for you.
Loan amount remaining
Review how much money you have left to pay off on your current loan. If you only have a small amount left on your loan, then it might not make sense to refinance because you are nearly done paying off the loan.
Time remaining on loan
Start by checking how much time is left on your current car loan. Then ask yourself: Do I want to pay off my car sooner, or do I need lower monthly payments right now?
Example: The Cost of Extending Your Loan
Let’s say you finance a car for $30,000 at 7% interest over 36 months (3 years).
- Monthly payment: $926.
- Total interest over 3 years: $3,347
After one year of payments, you’ve paid $1,805 in interest and still owe $20,689. You decide to refinance that balance into a new 60-month loan (5 years) at the same 7% interest:
- New monthly payment: $410
- New interest paid over 5 years: $3,891
- Total interest paid across both loans:
- First loan (1 year): $1,805
- Second loan (5 years): $3,891
- Total: $5,696
That’s almost $2,350 more in interest than if you had just stuck with your original loan. If your goal is to save money in the long run, try to refinance with ashorter or similar loan termand alower interest rate. Stretching out your loan can make payments easier each month, but it usually means you’ll pay more overall.
