Why should I refinance my car?
Most people refinance their car loans to 1) lower their monthly payments, 2) decrease their interest rates, or 3) remove (or add) someone to their loans. Let’s look at each reason for refinancing.
1. Lower Your Monthly Car Payments
One of the most common reasons people have to refinance their car loans is to lower their monthly payments. If saving month every month is your refinancing goal, you need to be careful that it doesn’t harm you in the long-run.
When you refinance, your lender issues you a new loan. This new loan can have a lower payment if the lender lowers your interest rate, extends your loan term, or does a combination.
A lower interest rate is always a good thing because until your loan is paid back, you have to pay your lender interest on the loan balance you still have outstanding. So, the lower your interest rate, the less in interest charges you will pay (assuming your loan term length does not change).
It is your new loan term length that warrants a closer look.
If your new loan extends the number of months over which you pay for your car, your payments will be lower (assuming your interest rate is not higher than before refinancing or you do not finance too many additional costs into your new loan). Again, lower payments are a good thing. However, because of the way car loan interest works, the more months over which you pay for your car, the more interest charges you pay for with your payments. So, know that if you extend your loan term, you may pay more for your car cumulatively over the term length of your loan. Still, it is possible to extend your loan term and pay less for your car by refinancing to a sufficiently lower interest rate.
For example, let’s say you took out a loan one year ago for $20,000 at 6% interest rate for a loan length of 48 months. Your monthly payments on this loan would be $469.70. After 12 months of payments, you decide to refinance your loan. If you simply lower your interest rate to, say, 3%, but do not extend your loan term, your new payments would be $449.01. While the payments are not much lower, you will pay less for your car in the end.
Now, let’s say instead of lowering your interest rate, you simply extend your loan term by 12 months. In this case, your new payments would be $362.61. These payments are over $100 less than your previous loan’s payments; however, in the end, you will pay more for your car because you will pay more interest charges.
Neither of these scenarios may sound that beneficial. But let’s say your auto loan service company matches you with a lender that will refinance your loan such that you lower your interest rate to 3% AND extend your loan term by 12 months. For this new loan, your new payments would be $341.75 (versus $469.70 originally) and you would save over $500 in interest charges over the course of your loan!
You can try out your own auto refinancing scenarios with our auto loan refinancing calculator.
2. Reduce Your Interest Rate
While many refinance customers are concerned with their car loan payments, some focus on how much they will pay for their cars in total.
As the example above illustrates, monthly payments do not tell the whole story when you consider how much you pay for your car. If you are paying a high-interest rate over a long loan term, you may have low monthly payments, but you will end up paying a great deal of money for your car by the end of your loan. For this reason, some refinance customers have the goal of reducing their interest rates.
A lower interest rate means lower interest charges per month, which in turn means that a larger portion of your monthly payments go towards paying your car loan principal (i.e. how much you borrowed) and less goes towards paying interest to your lender.
3. Remove (or Add) Someone as a Co-signer
Not all customers refinance to save money. Sometimes, a person may have more personal reasons to refinance, such as removing someone from his/her car loan. For instance, when a relationship comes to an end, a person may want to remove his/her ex-partner from his/her car loan.
No matter your reason for refinancing, it is important to find the right loan that fits your personal needs.
At Innovative Funding Services (IFS), we understand that everyone has a story, which is why our Finance Advisors take the time to listen to every customer’s reasons for refinancing. If you are looking to refinance your car loan, apply today. We will assign a dedicated Finance Advisor to you who will work to find you an auto loan that meets your needs.