When you refinance an auto loan, you’re taking out a new car loan with, hopefully, a lower monthly payment and a better interest rate. The refinancing process is slightly different than regular car financing since you’re looking for a new loan on your current vehicle. But the question of how much your payment will change and how long you can refinance your car for depends on your situation.
What Refinancing Does to Help You
In addition to being prepared with the right documents, it’s important to know what refinancing will do for you. When you refinance, the main goal is to lower your monthly payment by qualifying for a better interest rate. In fact, many borrowers who choose to refinance have an initial auto loan with a higher-than-average monthly payment and interest rate.
In this example, the loan amount and length are the same. Using two different interest rates, you can see how different your financial situation can be when you refinance:
Original loan with a 60-month loan term:
- $20,000 loan with a 16 percent interest rate
- Monthly payment: $486
- Total interest paid: $9,182
New loan with a 60-month loan term:
- $20,000 loan with an 8 percent interest rate
- Monthly payment: $406
- Total interest paid: $4,332
With the new loan and a better interest rate comes a lower monthly payment and $4,850 less in interest charges.
Another option when refinancing is that you can shorten the loan term. Although your monthly payments may be the same or higher, with a lower interest rate, the total interest paid will decrease even more dramatically. Using the same numbers but with shorter loan lengths, here’s what you could expect:
New loan with a 36-month loan term:
- $20,000 loan with an 8 percent interest rate
- Monthly payment: $627
- Total interest paid: $2,562
New loan with a 48-month loan term:
- $20,000 loan with an 8 percent interest rate
- Monthly payment: $488
- Total interest paid: $3,436
How you want the new loan to look is up to you and your budget. Make sure you take your entire budget into account before heading to a lender to explore your options.
Bottom Line
The most important thing to do is to understand your finances. If you aren’t prepared to refinance, or worry you won’t get a better rate, it might be a good idea to hold off a bit longer. If you're prepared and want to see your refinancing options, just fill out the free and easy refinance request form on our website to get started.
On the other hand, if you need a car loan but don’t know where to turn, let Auto Credit Express lead the way. We connect car buyers with local special finance dealers who have the lenders available to work with different types of credit situations. All you have to do is fill out our free auto loan request form to get started today.
