Should I refinance my car?
Quick insights
- When you refinance a car loan, you might adjust monthly payments and may help you save money over time.
- Refinancing your car can be a good idea if you can get an interest rate or loan term that meets your budget and goals.
- It’s important to understand the terms of refinancing a car before deciding to apply.
Saving money might come to mind when you think of refinancing a car loan. Exactly how much you could potentially save depends on several factors, such as the interest rate and loan term. There are several ways, however, to approach the question, “Should I refinance my car?”
Why do people refinance auto loans?
The main reasons for refinancing a car are to pay off a loan faster, slower or over roughly the same period at a lower rate. Each method could save money in slightly different ways.
Faster payoff
The loan term, also called the repayment period, is how long it will take to pay an auto loan in full. A shorter loan term creates less time for interest to accrue. As a result, you’d pay less total interest regardless of the interest rate. However, the monthly payments may be higher when refinancing a car loan to a shorter term. It depends on the term and the interest rate.
Refinancing a car loan to a shorter term is attractive for a couple reasons: the potential savings and the chance to remove a car payment from your monthly budget sooner. People might also want to have their car paid off faster just to fight the effects of depreciation—the decrease in a car’s value with time, wear and use.
Slower payoff
Longer loan terms usually have lower minimum monthly payments than shorter loan terms because the loan balance is spread out over more time. For instance, a four-year term has 48 payments, compared to a three-year term, which has 36 payments. The potential to lower a monthly payment is why refinancing for a slower payoff becomes appealing for some.
With a longer loan term, more interest will accrue on a loan the longer the repayment period, regardless of the interest rate. However, that’s a tradeoff people might make, especially when car payments become difficult to manage within a monthly budget.
Saving interest
A lower interest rate causes less interest to accrue, regardless of the repayment period. Refinancing a car to get a new rate could therefore save money on a monthly basis and over the entire repayment period.
A lower interest rate doesn’t guarantee lower monthly payments. The new loan term and remaining balance are also needed to calculate your monthly car payment. However, the interest savings will remain when refinancing at a lower interest rate.
Should I refinance my car?
Refinancing your car loan can be a good idea if it helps lower your monthly payments or interest rate. Either benefit could depend on your credit score improving or interest rates dropping since you signed your original loan agreement. Refinancing might extend your loan term, which can reduce your monthly payment. This may be a significant benefit for some at the cost of increasing how much interest is paid over time.
Before deciding you could compare different offers, rates and terms to find a refinancing option that works for you.
When should I refinance my car?
A good time to refinance a car loan might be when your credit score improves or interest rates go down. Those are some of the main factors that determine the rate offered when you apply for refinancing. You could also time it to when you simply want to switch lenders or lower your monthly payment (by paying off your loan slower). On the flipside, refinancing might not be worthwhile if your car is old, or you owe more than it’s worth.
Comparing refinancing offers
To refinance your car and save the most money, you may need to review several rates and offers at different times. When you review offers, comparing these key factors can be helpful:
- Interest rate: Lower rates are generally more appealing because of their effects on the total cost of a loan and the monthly installment amounts.
- Loan term: The length of the repayment period affects the cost of a loan but also represents your new commitment after you refinance.
- Monthly payments: It’s important that a car payment fits within your budget. When you apply or prequalify for a loan, you may get an estimate of your new monthly payments.
- Fees: There might be application and processing fees for refinancing, including prepayment penalties on your existing loan.
In conclusion
Refinancing may offer savings on interest payments over the life of the loan. Doing so at the right time and with ideal terms for you can maximize the financial benefits. There are pros and cons of refinancing to weigh, as well, such as a hard credit inquiry and potential prepayment penalty. As with any financial decision, personal situations and long-term goals are among the most important factors to consider.
