3 Reasons to Refinance Your Auto Loan
Do you love your car but you’re not happy with your current auto loan?
Unfortunately, the chances of getting your lender to give you a better rate or term aren’t great.
So, what can you do about it?
The good news is there are lenders out there who would love to have your business. And, to get your business they may pay off your current loan and create a brand new loan for you with possibly a lower interest and even better terms.
This is known as refinancing your auto loan.
Reason #1: Save Money
The most common reason drivers want to refinance their vehicle is to save money. When financing a vehicle, you’re paying for the cost of the vehicle plus the interest to finance it.
Let’s assume you signed a note for $40,000 at 6% over a 60-month term.
| Original Loan Amount | Interest Rate | Term | Total Interest | Total Cost of Vehicle |
|---|---|---|---|---|
| $40,000 | 6% | 60 months | $6,399 | $46,399 |
At a 6% interest rate for five years, the total cost of the $40,000 vehicle becomes $46,399.
But, what happens when you lower your interest rate from 6% to 2% by refinancing with a credit union, local bank, or any other lender who offers a better rate?
| Refinance Balance | New Interest Rate | Term | Total Interest | Total Cost of Vehicle |
|---|---|---|---|---|
| $40,000 | 2% | 60 months | $2,067 | $42,067 |
As you can see, refinancing a 6% auto loan into a new loan with a lower 2% interest rate saves a significant amount over the life of the loan!
Reason #2: Lower Your Monthly Payment
Many drivers get so excited when they drive off the lot with their new car that they often overestimate how much car payment they can afford.
If you’re feeling overextended with your monthly car payment, refinancing may be a good option to lower your monthly payment in order for it to fit within your monthly budget.
When lowering your monthly payment, you have a few options:
- Lower your interest rate
- Extend your term
- Do both
Lower Your Interest Rate
| Original Loan Amount | Interest Rate | Term | Total Interest | Total Cost of Vehicle | Monthly Payment |
|---|---|---|---|---|---|
| $40,000 | 6% | 60 months | $6,399 | $46,399 | $773 |
In this example, your original loan has a monthly payment of $773.
But how much would you expect to save each month by lowering your interest rate from 6% to 2% while keeping the 60-month term the same?
| Refinance Balance | New Interest Rate | Term | Total Interest | Total Cost of Vehicle | NEW Monthly Payment |
|---|---|---|---|---|---|
| $40,000 | 2% | 60 months | $2,067 | $42,067 | $701 |
As you can see, you would add $72 back into your pocket each month by simply moving from a 6% rate to a 2% interest rate.
Extend Your Term
| Original Loan Amount | Interest Rate | Term | Total Interest | Total Cost of Vehicle | Monthly Payment |
|---|---|---|---|---|---|
| $40,000 | 6% | 60 months | $6,399 | $46,399 | $773 |
Another way to lower your monthly payment is to increase the number of monthly payments on your auto loan.
| Refinance Balance | New Interest Rate | Term | Total Interest | Total Cost of Vehicle | NEW Monthly Payment |
|---|---|---|---|---|---|
| $40,000 | 6% | 84 months | $9,085 | $49,085 | $584 |
By extending the term of your auto loan by 24 months, you will drop your monthly payment by $189.
But keep in mind, this also adds another $2,746 in interest which costs you more in the long run.
Therefore, only choose this option if you're in financial hardship and you cannot make the monthly payments for your original auto loan. Missed payments can wreak havoc on your credit.
Extend Your Term and Lower Your Interest Rate
| Original Loan Amount | Interest Rate | Term | Total Interest | Total Cost of Vehicle | Monthly Payment |
|---|---|---|---|---|---|
| $40,000 | 6% | 60 months | $6,399 | $46,399 | $773 |
Your best option to lower your monthly payment is to do both — lower your interest rate and extend your term.
| Refinance Balance | New Interest Rate | Term | Total Interest | Total Cost of Vehicle | NEW Monthly Payment |
|---|---|---|---|---|---|
| $40,000 | 2% | 84 months | $2,899 | $42,899 | $511 |
As you can see, your payment decreases $262 per month and you also save $3,500 in interest over the life of the loan.
Reason #3: You Opened Your Current Loan at the Dealership
If you have purchased a new vehicle before, then you’ve experienced the emotional high when going through the new car buying process at the dealership.
However, once you make a few monthly payments, you realize the rate and terms aren’t as good as you’re seeing at your local bank or credit union.
If this is you, you’re not alone. It’s time to refinance.
Other Reasons to Refinance
Beyond the top three reasons for refinancing your auto loan, there are still plenty of other reasons to refinance your current loan.
Improved Credit Score
Lenders will look at your credit score when determining which interest rate you will receive. According to Experian, moving from a credit score of 690 to 720 can lower your interest rate by over 1%. If you know your credit score has increased since you purchased your vehicle, now may be a great time to refinance.
End of Your Lease
If you’re in a lease and you love your car, you may want to consider refinancing the vehicle to become the owner. The process is straightforward — ask your lease company for a payoff amount and then obtain a loan from your local bank or credit union and purchase the vehicle.
Pay Off Your Loan Quicker
If you want to pay off the loan quicker, you may want to consider a shorter term. This works well if current rates are lower than what you’re currently paying. Often, drivers can refinance their loan into a lower rate, with a shorter term, and keep a similar monthly payment.
Should I Refinance?
Interest rates are the lowest they have been in nearly a decade, therefore now may be the perfect time to refinance your current auto loan.
Whether you’re looking to save money, lower your monthly payment, or secure a better loan, refinancing may be a great financial move.
By Chris “Peach” Petrie,
Founder of Money Peach
Chris “Peach” Petrie is the founder of Money Peach. Money Peach partnered with OneAZ to provide free financial education to members across the state. To learn more about OneAZ’s partnership with Money Peach, click here.
APR = Annual Percentage Rate
