If you financed your car, you might be feeling the burden of your car payments. Refinancing, you’ve heard, can reduce that burden, saving you money every month, and even reducing the total cost you’ll pay for your car.
But what does refinancing a car mean?
Refinancing is a way to finance your car again. Financing is the process of getting a loan to help you pay for your car. When you refinance a car, you get a new loan for the rest of the money that you still owe on your car. The new loan pays off your old loan, then you pay off your new loan.
The new loan is a different contract, so it can have different characteristics. It can be for a different term, or length of time. You can add or eliminate cosigners, people who sign the loan with you, agreeing that they also are responsible for paying back the loan. Hopefully, too, you’ll get a different – better – interest rate. This is the main goal of refinancing a car, because getting a better interest rate is what will save you money.
To get a sense of what refinancing a car means, let’s look at an example. In 2020, the average loan for a new car was about $35,000, the average APR was about 9.5%, and the most common loan term was 72 months (6 years).
With this loan, you would have a monthly payment of $639.61 and would pay a total of $46,052.22, the original $35,000 plus $11,052.22 in interest.
Let’s say you want to refinance after a year (typically the minimum you want to wait before refinancing). In the first year, the 12 payments would add up to $7,675.32, of which $3130.48 was interest and the rest came from the principal (the money still owed from the original loan). This leaves an ending balance of $30,455.12 still owed.
Refinancing at this point means getting a new loan for the remaining balance. If your financial situation hasn’t improved much, you might not be able to get much better terms. Let’s say you can only reduce your interest rate to 8%, and you want to finish at the same time as the original loan. To do this, your new loan will have a term of 60 months (72-12 months for the first year). In this situation, your new payment will be $617.52. This is not much of a benefit: the payment is only about $20 less a month, and the total savings is just over $1300. Fees and other costs of refinancing means it might not be worth it to refinance at this point.
Instead, let’s say you focus on doing things that will improve your credit and make you more desirable to lenders:
After two years of making payments on the old loan, you still owe $25,459.17 in principle on your old loan. Now, though, you can get a much better interest rate: 4%! In this case, when you get a new loan to pay off the old balance, your new payment will be $574.84, and over the four years remaining on the loan, you will save $3109 – much better!
Note: If you could have secured a 4% rate after one year of payments, you would have reduced your payment to $560.88 and saved a total of $4724. When you are considering refinancing, it’s important to do what you can to lower your interest rate as much as possible.
We’ve shown how much difference it makes getting a better interest rate when refinancing a car. One of the best ways to get a better interest rate is to shop around. The problem with shopping around is that it can be very time-consuming. You have to talk to many people and put in multiple applications.
With our You First Approach™, iLending makes shopping around easy and hassle free. We work with hundreds of lenders around the country to help you find a lender who offers better terms to people like you. You just give us some basic information and your loan consultant will search for the best loans available for you.
Because lenders are looking for different borrowers, we can usually match someone with a lender that will offer them better rates. Our customers save an average of $145 a month on their car payments. Check out our Savings Stories to see how much individual customers have been able to save, and how it’s changed their lives.
Want to learn how we can help you? Start the online application process here. It takes only a minute or two to complete the initial application.