Refinancing a car loan can help you save money, but only in certain situations. Here are two of the more common instances when you should consider refinancing an auto loan.
When You Can Get a Lower Interest Rate
Refinancing a car loan means you take out a new loan on your current vehicle, which allows you to get different terms. If your credit has improved since taking out the original loan or if interest rates overall have dropped, you may be able to qualify for a lower rate when refinancing. Doing this can help you get a lower monthly payment and save money in the long run.
For example, let's say you had less than perfect credit when taking out your car loan and received a 14 percent interest rate. After two years of making all of your car payments on time, your credit has improved to the point where you qualify for a seven percent interest rate if you were to refinance. Here's how much money you can save over the remainder of your term if your loan balance was at $10,000 and you still had 36 monthly payments left:
| Monthly Payment | Interest Paid | Total Cost | |
| 14% APR Loan | $341.78 | $2,303.97 | $12,303.97 |
| 7% APR Loan | $308.77 | $1,115.76 | $11,115.76 |
As you can see, if you can get a lower interest rate when refinancing, you can lower your monthly payment and the overall cost while keeping the term the same. In instances such as this, refinancing is certainly worth doing.
If you've got room in your budget, you could also opt to shorten your loan term when refinancing as well. This will increase your monthly payment, but decrease your total cost because you'll pay less in interest charges. However, you shouldn’t bother refinancing to shorten your loan term if you aren't able to get a lower interest rate. Instead, just increase your monthly payment which, with a simple interest loan, will pay off your loan earlier. Then you won't have to go through the process of refinancing.
When You Need to Lower Your Monthly Payment
Another situation where it would make sense to refinance your car loan is if your payments are too expensive. You could extend your loan term so as to lower your monthly payment. This should only be done when you absolutely need to lower your payment, as refinancing a car loan and extending the term will increase the total cost.
For example, if you had a remaining loan balance of $10,000 and a six percent interest rate, here's what would happen if you extend the remaining 36-month term to 60 months:
| Monthly Payment | Interest Paid | Total Cost | |
| 36-month loan | $304.22 | $951.88 | $10,951.88 |
| 60-month loan | $193.33 | $1,599.68 | $11,599.68 |
Even if you aren’t able to lower your interest rate when you refinance, extending the term will help give you short-term flexibility in exchange for a higher overall cost.
The Bottom Line
Depending on your situation and how you approach it, you can improve your situation and, in some cases, even save money when you refinance a car loan. Make sure you look closely at your situation and find out if you can accomplish what you want beforehand.
On the other hand, if you're looking for a car loan, CarsDirect may be able to help even if you have less than perfect credit. Our service connects car buyers to local finance dealerships that specialize in helping car buyers dealing with unique credit problems get financed. Start the process by submitting our free and secure auto loan request form right now.
