What does it mean to refinance a car loan?
When you take out a loan for a car, the car is considered the collateral for the loan. If you default on the loan, the lender can seize your vehicle and sell it to recoup at least some of their losses.
Refinancing your car means swapping out your old auto loan for a new one that has different terms, such as a lower interest rate or shorter repayment period. Why would you want to do this? There are several reasons why refinancing could make sense:
What are the benefits of refinancing a car loan?
If you refinance your car loan to get a lower interest rate, your monthly payments will go down. If you can negotiate a longer term, the monthly payments will likely also be smaller. Either way, refinancing can save you money each month—and possibly hundreds or thousands of dollars over the life of the loan.
What are the risks of refinancing a car loan?
It's important to remember that refinancing is an option, not a guarantee. There are some risks to be aware of before deciding to refinance your car loan.
How do I know if refinancing is right for me?
There are a few signs that refinancing could be a smart move. If you’re getting a much lower rate with your new lender, it is probably going to benefit you. The key to deciding if refinancing makes sense for you is weighing the interest savings against the extra money you will pay over the life of the loan.
You can use our calculator to see how much you would save if you refinance. You can also calculate how much extra money you would pay over time, and weigh that number against your monthly savings (which is also shown in the calculator).
If your goal is to lower your monthly payment, but not necessarily make progress toward paying off your car faster, then refinancing may be right for you. But just like any other loan decision, refinancing comes with pros and cons.
How do I refinance a car loan?
When considering how to refinance a car loan, there are a few things you should keep in mind: understand your options, shop around with different lenders, check your credit score and do your research. You’ll want to be prepared to provide the lender with documents and be open to negotiations. Ask questions and make sure you read through the contract before signing it.
Refinancing can lower your monthly payments, but it can also cost you more over the long term. Weigh the options carefully before you commit.
You can refinance your car loan for a lower interest rate, but there are drawbacks to doing so. If you have a high-interest car loan, refinancing it could lower your monthly payments and save you money in interest charges. But by stretching out the term of your new loan, you'll pay more in interest over the life of the loan. And if you refinance for a shorter term, your monthly payments will go up.
For example: Say you have a five-year car loan at 6 percent APR with 60 monthly payments of $350 each — totaling $21,000 over five years:
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