Done correctly, refinancing an auto loan has a few advantages. The most important is that it can save you money every month. But, if you’re not careful, it can cost you more in the long run. Here’s a look at some of the benefits of car loan refinancing, whether it can help you save money, and whether or not it might be right for you.
Refinance to lower your payment. The only real benefit of refinancing an existing car loan is a monthly savings on your car loan payment, and possibly overall interest charges. Refinancing is a good idea when your situation has changed, either for better or for worse.
If your financial situation has changed and you need some extra room in your monthly budget, refinancing might be just what you need to stay on top of your payments. But, if your credit has improved, you may be eligible for a lower interest rate to save money each month and overall.
There are several ways to reduce your monthly payment through refinancing, either by lowering your interest rate, extending the term of your loan, or both. If you qualify for both a longer loan and a lower rate, you can save the most each month. However, a longer loan term by itself only saves you month to month, you actually end up paying more interest charges the longer you have your loan.
Is refinancing a good idea? Imagine that two borrowers took out similar loans: their loan was initially for $30,000 at 13% interest for 60 months. After about three years, both borrowers still owe about $15,000 and have three years left to pay.
Borrower 1 has improved their credit and qualifies for a lower interest rate, but does not change the term of their loan. Borrower 2 did not, so he qualified for a longer loan.
$15,000 to $505.41 per month
13% interest $3,195 total interest
36 months $18,195 in total with interest
Refinancing borrower 1:
$15,000 $477.00 new monthly payment
9% interest $2,172 in aggregate interest
36 months Total loan of $17,172 with interest
Refinancing borrower 2:
$15,000 $402.41 new monthly payment
13% interest rate $4,316 in aggregate interest
48 months Total loan of $19,316 with interest
As you can see, even though Borrower 2 makes a lower payment each month after the refinance, they are paying $2,144 more overall. At some point, paying too much for a vehicle can lead to negative equity, which can make it harder to sell or trade in when the time comes.
If you think refinancing is the right path for your situation, you should make sure you meet all the conditions before you start the process. The lenders who refinance each have stipulations that you must respect. Although these are great, you generally need to have your auto loan for at least one year, have good or improved credit, and have a vehicle and loan amount that meets the lender’s specifications.
When you’re ready to refinance, we want to help. Connect to a refinance specialist by completing our fast and free auto loan refinance application form.