Refinancing a car is a great way to save money on your monthly payment, but you may not save overall. Whether or not you save in the long run depends on how you refinance, and how much your credit has improved since you took out your loan. Let's take a look.
A big part of how much you end up paying for your auto loan is interest. The higher your interest rate, the more it costs you to borrow money. This means you'll pay more interest charges over the life of your loan than someone with a lower interest rate.
If you originally took out a bad credit car loan, or only qualified for an interest rate that's higher than you wanted, refinancing can help you save money if you refinance to a lower interest rate.
According to Experian's State of the Automotive Finance Market report in the fourth quarter of 2021, the average used car loan amount was $27,291, and the average loan term was 67.36 months. Using this real-world example, let's look at how refinancing can save you money. For our example, we're rounding to a five-year loan term of 60 months.
$27,291 loan, 15% interest rate, 60-month loan
- Monthly payment: $649.25
- Interest paid: $11,664
- Total Cost: $38,955
$27,291 loan, 9% interest rate, 60-month loan
- Monthly payment: $566.52
- Interest paid: $6,700
- Total Cost: $33,991
As you can see, taking out a bad credit car loan can be very costly. If you have improved your credit and can qualify for a lower interest rate, it could save you thousands over the life of your loan.
The other option when refinancing is typically to extend your loan term, but this doesn't save you money in the long run. In fact, if you stretch your loan term without lowering your interest rate you actually end up paying more for your vehicle in the end.
In today's market, where the costs of vehicles are on the rise, qualifying for the lowest possible interest rate can be key to saving money. If you have improved your credit over the past year or two, and have kept up with your loan payments, you may be eligible to refinance your car to save money.
If you're ready to look for a lower interest rate for your car loan, we want to help. Simply fill out our fast, free, auto loan refinancing request form to get started.