Done correctly, refinancing an auto loan has a few benefits. The biggest one is that it can save you money each 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 auto loan refinancing, if it can help save you money, and whether or not it might be right for you.
Refinancing to lower your payment. The only real benefit to refinancing a current car loan is a monthly saving in your auto loan payment, and possibly in overall interest charges. Refinancing is a good idea when your situation has changed – either for the better or for the worse.
If your financial situation has changed and you need some extra space in your monthly budget, refinancing could be just the thing you need to stay current on your payments. But, if you're credit has improved, you may be able to qualify for a lower interest rate to save yourself money each month and overall.
There are a few ways to lower your monthly payment through refinancing, either by lowering your interest rate, extending your loan term, 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 in interest charges the longer you have your loan.
Is refinancing a good idea? Let's imagine two borrowers took out similar loans: their loan was originally for $30,000 at 13% interest for 60 months. After about two years, both borrowers still owe around $15,000 and have three years left to pay.
Borrower 1 has improved their credit and qualifies for a lower interest rate, but doesn't change their loan term. Borrower 2 didn't, so just qualified for a longer loan.
$15,000 at $505.41 per month
13% interest $3,195 in interest overall
36 months $18,195 total with intereest
Borrower 1 refinancing:
$15,000 $477.00 new monthly payment
9% interest $2,172 in overall interest
36 months $17,172 total loan with interest
Borrower 2 refinancing:
$15,000 $402.41 new monthly payment
13% interest rate $4,316 in overall interest
48 months $19,316 total loan with interest
As you can see, even though Borrower 2 makes a smaller payment each month after refinancing, they pay $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 need to make sure you meet all the qualifications before you dive into the process. Lenders that refinance each have stipulations you're required to meet. Though these very, you typically must have had your auto loan for at least a year, have good or improved credit, and have a vehicle and loan amount which fall within the lender specifications.
When you're ready to refinance, we want to help. Get connected to a refinancing specialist by filling out our fast, free auto loan refinance request form.