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Refinancing a Car Loan

As interest rate drop, people often turn to refinancing their home loans but many fail to take advantage of car loan refinancing. This is because most people don't know that refinancing a car loan can be just as easy and can save some serious money.

What is Car Refinancing?

Car refinancing is no different than home refinancing. When you refinance your car loan you take another loan from the same or different lender to pay off your original car loan. The new loan has a lower APR, which is in fact the whole point of refinancing. Thus, you get lower monthly car loan payments and you save money from interest.

Have in mind the many lenders will not agree to refinance their own car loans so you would probably have to look for another lender to do the refinance.

Benefits of Car Loan Refinancing

In order to better grasp the benefit of auto loan refinancing, let's consider the following example:

Say you have bought a new $25,000 car a year ago and have used a 3-year loan at 11% interest rate for this purpose. Your monthly payments are $818. Now that interest rate has dropped (or you have significantly improved your credit score) you consider the possibility of refinancing.

Let's assume you have found a company that offers you refinancing to a 6% auto loan. Your monthly payment will drop by about $40 and while the interest remaining to be paid of your current loan is about $2,082, with your new proposed loan you will owe only about $1,119. That means that you will save almost $1000 in interest charges over the life of your car loan.

Add those saved $40 monthly principle to the current $778 monthly payments, and you will pay off your loan even quicker.

  Monthly Payment Interest remaining to be paid:
Current Loan $818.46 $2,082.36
Proposed Loan $778.30 $1,118.52

When refinancing, consider this rule of thumb: The earlier you refinance, the more money you will save. This is because with car loans, you pay the interest mostly with your earlier payments.

If in the example above the refinance was done 6 months after the car purchase, then the savings in interest charges would be almost $1500. As you can see, time does matter when it comes to car loan refinance.

Finally, don't forget to check your car loan terms for any fees and early payoff penalties that might be present. Include them in your calculations to find out whether refinancing will be of any use to you for your particular situation.

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