How Much Money Can I Save When I Refinance My Car Loan?
If you’re struggling financially due to an expensive monthly car payment, auto refinance may be a great option for you. Refinancing your car loan can provide significant savings over the lifetime of your loan, infusing your monthly budget with additional cash that can be used to pay down other debts, make repairs on your home, build your savings account, take a much-needed vacation, or make an expensive purchase you’ve been struggling to afford.
But how much money can you really save?
On average, people save $143 per month when they refinance a car loan with iLending. Over the lifetime of the loan, this could equate to thousands of dollars!
How Do I Save Money When I Refinance My Car Loan?
When you refinance a car loan, you’re taking out an entirely new loan to pay off your existing one. The new loan then replaces your existing loan, and you’ll begin making payments on it based on the new terms established by this loan.
This allows you to save money in several ways:
- You can secure a lower interest rate – This will result in a lower monthly payment if you refinance for the same loan term, and you’ll also save money over the lifetime of the loan since you’re paying less in interest.
- You can extend the loan term to lower your monthly payments – If you refinance for a longer term (i.e., your repayment period is longer for the new loan than the existing one), you’ll be able to lower your monthly payments. This will save you money each month, adding cash into your budget. However, you may end up paying more money over the lifetime of the loan since interest will be accruing for a longer time period.
The ideal scenario is to lower your interest rate, which will allow you to unlock significant savings over the lifetime of your new loan, as we illustrated in the examples above.
The iLending Difference – A Real Life Example
Even with interest rates rising significantly over the last year and a half, our loan consultants have been able to help our clients achieve significantly lower rates through refinancing. In the two most recent months, we’ve been able to secure an average interest rate decrease of 5.38% (January 2023) and 4.94% (February 2023). Let’s use some hard numbers to demonstrate the savings possible when you’re able to lower your interest rate this significantly.
When you take the average of these two most recent monthly interest rate reductions we’ve achieved for our clients, it comes out to an average of 5.16% across both months. For the purposes of our real life example, we’ll examine the savings associated with a 5% interest rate reduction, which is a little lower than this two-month average we’ve achieved for the start of 2023.
Most car loans use an amortizing interest schedule. This means you’re paying a larger percentage of your monthly payment to interest at the start of the loan term. As you move further into the loan term, this switches a larger percentage of your monthly payment will go towards the principal balance, with less being applied to interest.
To calculate interest on an amortized loan:
- Divide your interest rate by the number of payments you’ll make that year.
- Multiply that number by your remaining loan balance to determine how much money you’ll pay in interest for that particular month.
- Subtract that interest from our fixed monthly payment to determine how much you’ll pay in principal that month.
- Repeat this process with the new remaining loan balance for the following month, and then keep repeating for each subsequent month for the lifetime of the loan.
Now let’s look at our example, using a standard amortized loan. If you initially financed $30,000 of your new car at a 12% interest rate for a five-year term, your monthly payments would be $667.33 and the total interest you’d pay over the life of the loan is $10,040.01.
If you refinance this loan after one year, you’d have paid $8,007.96 and your remaining loan balance would be $25,341.29. With the 5% average interest reduction achieved by iLending, your new interest rate would be 7%. If you kept the same loan term, you’d have a four-year loan term on your new loan. In this scenario, your monthly payment would be $606.83 and the total interest you’d pay over the life of the loan is $3,786.49.
Now let’s unpack your total savings in greater detail:
- Total interest paid in the first year of your initial loan = $3,349.29
- Total interest remaining if you pay off your initial loan to completion = $6,660.72
- Total interest for the life of the new loan = $3,786.49
- Total money saved in interest by refinancing after 1 year = $2,874.23
Over the four years of your refinanced auto loan, you’d save $2,874.23. This is a significant amount of money! Think about what you could do with an additional $2,874.23!
You can use our auto refinance calculator to get a better understanding of what you can save when you refinance your car loan.
Apply now to get the car loan refinance process started.
What would you do with an extra $132* in your pocket?
