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Like most other loan types, car loans come with obligatory monthly loan payments. But what if your car payments are a bit too expensive for you to comfortably handle? Or what if you want to shave a few hundred dollars off the overall interest amount you have to pay on your current loan?
In these scenarios, refinancing your car loan might help. But is refinancing really that much cheaper than sticking to your original car loan?
Car refinancing involves replacing an existing auto loan with a new one. The idea behind car refinancing is to obtain another loan with better terms and a lower rate, which can help you lower your payments and interest and save you money over the long run.
If you think you’ll be able to qualify for a car loan at a much lower rate than what you’re currently paying on your existing car loan, then refinancing might make sense.
For example, maybe you happened to lock in a car loan when the going rate was much higher, or perhaps your credit score has vastly improved since you initially took out your car loan and you are now able to qualify for a lower rate. Either way, refinancing at a lower interest rate can be a huge money-saver and a good reason to refinance your car loan.
When is it the right time to refinance your car loan? There are a few situations in which a car refinance might make sense:
Your lender will assess your finances before approving you for a car loan and deciding what type of interest rate you qualify for. The more income you earn, the less of a risk you’ll be for your lender, in which case you may qualify for a lower rate. If your financial situation has improved since you initially took out your car loan — whether through a salary raise or a decrease in debt — you may be eligible for a better interest rate when you refinance.
Your credit score is another key metric used by lenders to assess the eligibility of a borrower for a loan. If your credit score has improved over the years, you may be in a better position to qualify for a lower interest rate today through refinancing and lowering your monthly payments.
When you first took out your car loan, rates may have been a lot higher compared to where they are today. Even if your financial situation and credit score haven’t changed, you may be able to get a lower interest rate through refinancing simply based on where current rates stand today.
If you want to lower your monthly car payments because they’re too expensive, you could extend the loan term by refinancing. That way, you’ll have a longer period of time to repay the full loan amount, which means the loan would be spread out over additional payment periods. It’s important to note that this option may make your payments lower, but it can cost you more in the long run.
Are you having a hard time keeping up with your car loan payments? Consider deferring your car loan payments.
If you need some extra cash for a large expense, you may be able to use the equity you’ve built up in your vehicle through regular loan payments. If you still owe money on your car loan, your equity would be equivalent to the vehicle’s current value, less your loan balance. Your lender will set its own rules for the maximum amount you can tap into.
There are several perks to refinancing your car loan, including the following:
Learn how you can refinance your car in someone else name.
Along with the benefits of refinancing your car loan are a few drawbacks to consider, including the following:
As mentioned, one of the more popular reasons for refinancing a car loan is to save money. With a lower rate, there are potential savings to be had. But there are also some fees associated with car loan refinancing that you should be aware of that could offset any savings you’d realize. It’s important to weigh the costs of refinancing with potential savings.
To illustrate the cost of refinancing, we’ll look at how much you’ll pay for the regular car loan vs how much you’ll pay if you stop your original loan to refinance.
Loan Amount | $20,000 |
Interest Rate | 13.5% |
Term | 5 years |
Monthly Payment | $460 |
Total Paid | $27,600 |
Total Interest Paid | $7,600 |
Now let’s say you decide to refinance your car loan after you complete 2 years of your current car loan. The table below shows that you’d pay $6,007 in interest (instead of $7,600) if you refinance and you’d be paying $45 less each month. When deciding to refinance ensure that your savings outweigh the fees your lender may charge you for refinancing.
Car Loan | Refinancing | |
Loan Amount | $20,000 | $13,565 |
Interest Rate | 13.5% | 6.5% |
Term | 5 years (but 3 years remaining) | 3 years remaining |
Monthly Payment | $460 | $415 |
Total Paid | $11,040 (in 2 years) | $14,940 (over remaining 3 years) |
Total Interest Paid | $4,605 | $1,402 |
Find out if you should refinance your car or trade it in?
You need to make sure that you meet the minimum requirements to qualify for a refinance, which will save you a lot of time, hassle, and unnecessary credit checks.
While there are plenty of reasons to refinance your car loan to help reduce your financial obligations, there are some situations in which a refinance might not make financial sense:
If you’re looking for a way to reduce your monthly car loan payments or want to lower your overall interest payments, refinancing your car loan is a great option. But before you go this route, be sure to weigh the costs of breaking your current loan against the savings of refinancing.
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