Unless you live in a city with reliable public transportation, you probably need a car to get around town. In fact, 95% of U.S. households own a vehicle, and 85% depend on their cars to commute to work. But while a car might be a necessity in its own right, there's no need to overpay for the privilege of owning one.
If you're currently paying a small fortune for your vehicle, you may want to refinance to a car loan with more favorable terms -- namely, a lower interest rate. Refinancing your car loan can reduce your monthly payments, and the better your credit score, the more favorable a rate you're likely to snag.
What is refinancing?
Refinancing basically means trading in your current loan for a new one. Ideally, your new loan will offer a better interest rate than what you're paying at present. If it doesn't, then you really have nothing to gain by refinancing, since the goal in doing so is to lower your monthly payments.
Why consider refinancing your auto loan?
If you're hoping to shave money off of your current monthly car payment, then refinancing might be the answer. It especially pays to see if you have the option to refinance at a better interest rate while keeping the term, or length, of your loan the same. This way, you'll lower your monthly costs without extending your repayment period. Remember, the sooner you knock out that auto debt, the more money you'll free up for other purposes, whether it's adding to your savings or having extra cash available for living expenses and leisure.
If your credit is better today than it was back when you first applied for your car loan, then it especially pays to see whether refinancing will buy you a significantly lower rate. Shaving a few points off your interest rate could save you hundreds of dollars (or more) over the life of your loan.
Does it pay to refinance my car loan?
Lowering your monthly car payment by refinancing might seem like a no-brainer, but keep in mind that there are costs involved in refinancing. Though they don't tend to be nearly as significant as, say, refinancing a mortgage, you'll most likely need to pay a new titling fee, even if you paid for one as part of your current loan. You might also get hit with recording and administrative fees that can eat away at your ultimate savings.
Now the good news is that lenders will often let you roll these fees into your monthly payments, as opposed to having to fork over the cash up front. But if your goal in refinancing is to lower the overall cost of your car, you'll need to take these fees into account when deciding whether to move forward.
Running the numbers
If you're still not sure whether it pays to refinance your auto loan, we have a calculator that can help you figure it out:
To use this tool, simply input your current loan balance, interest rate, and monthly payment. Then, input the interest rate you might snag with a refinance. From there, our calculator will tell you how much you stand to save each month.
One thing to keep in mind is that some lenders require a minimum loan balance for a refinance. The reason is that lenders make money by collecting interest, so if your car is mostly paid off, it may not be worth the paperwork to let you refinance a smaller loan. But if you still owe a considerable amount on your vehicle, you have nothing to lose by exploring your options for refinancing.