Car and home purchases are typically the largest purchases that most people will ever make. Because of the cost of the average home or new car, most consumers take out a loan to cover all or part of the cost.
Although both types of loans can take a long time to pay off, car loan terms can range anywhere between 24 and 72 months — sometimes longer. These payments can be a drain on your finances.
If you are currently paying off an auto loan, car loan refinancing can help you save money over the length of your repayment period, in the form of lower monthly payments or both. How much money you save depends on several factors including your goals, current interest rates and your creditworthiness.
What Is Auto Refinancing?
Auto refinancing is the process of changing the terms of your current car loan. If your refinancing application is approved, your lender issues you a new loan that replaces the one you had. The differences are in the loan terms.
For example, you could refinance at a time when interest rates are lower than what they were when you took out your original loan, or you could qualify for a lower interest rate based on an improvement in your financial situation or credit score.
Over time, you’ll save money as you repay your balance at the lower rate. You might also be able to shorten or lengthen the amount of time over which you’ll need to make payments.
Understanding Your Savings
When considering a car loan refinance, it’s important to determine what your goals are. If you are looking to reduce the amount of money you pay over the length of your loan, you’ll either want to reduce the interest rate that you were locked into when you first entered into the auto loan financing process, reduce the number of payments left on your loan (even if it means making higher monthly payments) or both.
On the other hand, if you are dealing with financial issues and need to free up some cash every month, you might want to refinance so that the length of your auto financing agreement is longer but with smaller payments each month.
If you don’t secure an interest deduction with this type of auto loan refinance, you might pay more over time than you would have with your original financing deal. However, since your payments are smaller, you’ll have more cash each month.
Factors That Influence Savings
The amount of money that you can save depends on multiple factors, including:
- Current interest rates: Current interest rates have a huge impact on the cost of your loan. If interest rates were high at the time that you signed your original contract, but have gone down since then, refinancing could save you money. However, if interest rates have gone up, it could end up costing you more money to refinance.
- Your financial profile: A financial profile includes several factors that affect the loan rate and terms that a lender offers you. Credit scores are a large part of this. If your credit score has improved since you were approved for your current loan, you might find that refinancing now could get you better terms.
And although your credit does have an impact on loan approval and terms, it isn’t the only factor lenders take into consideration. Your debt-to-income ratio (DTI) and loan-to-value ratio (LTV) on your current car loan are also factored in during the approval process.
- Loan length: In many cases, the fewer payments you make, the more money you save over time. However, if you are refinancing to free up cash for your monthly budget, a longer loan term might provide you with lower monthly payments.
- Lender fees: Lenders often charge fees when you apply for a loan, and sometimes your current lender will charge prepayment fees if you pay off your loan early. These fees vary, but you’ll want to check with the lenders and factor them in when you are calculating the cost of refinancing your vehicle.
- Car condition and mileage: Your car’s current condition and mileage also factor in when applying for an auto refinance. The better condition your car is in and the lower the mileage, the more likely you are to get better loan terms.
To get an idea of what you might be able to save, try using a refinance car loan calculator to determine what your savings and monthly payments might be. Be prepared to provide the balance left on your loan when you use one of these calculators.
Shop Around to Find the Best Auto Loan
Everyone is different, of course, so it’s worth it to do some research, run some numbers and check your options for refinancing. If you decide to apply for refinancing, make sure you shop around for lenders to find the best interest rate and loan terms. You might be able to save money long-term while also reducing your ongoing expenses.