Refinancing your car loan is a great way to lower your payments and save money over the lifetime of your loan. While most people tend to focus on the interest rate and the total amount of monthly payments when refinancing a car loan, it’s also important to choose the right loan term for your specific needs. This is key to getting the best value on your refinance since the loan term is one of the two primary factors that will impact how much you pay over the lifetime of your new loan (the interest rate is the other factor).
The loan term refers to the total amount of time it will take to pay off your car loan if you only make your monthly payments. Auto loan terms are issued in 12-month increments. The most common initial car loan term is 72 months (6 years), but many individuals choose shorter terms, especially when refinancing.
What Is Considered a Short Loan Term for Car Refinance?
In general, your refinanced loan will be considered a short-term loan if the repayment period is 48 months or less. If your primary goal is to save money over the lifetime of the loan, a shorter term is the best option when you refinance. This is because you’ll pay less interest when your loan term is shorter.
Other benefits of a short term for your auto refinance include:
Earn a lower interest rate – Many lenders will offer lower interest rates on short-term loans than long-term loans, increasing your chances of securing the best possible rate.
Build equity in your vehicle faster – You’ll pay down the loan faster with a short-term loan. This reduces the chance that you’ll owe more than the car is worth, which may cause you to default on the loan or owe a significant cash payment in the event that your vehicle is totaled in an accident.
Save on insurance – Most lenders will require you to carry full-coverage auto insurance until your loan is paid off. Once you pay off the loan, you have the ability to lower your coverage to the minimum amount required by your state. The ability to make this switch will happen faster with a short-term loan.
Eliminate loan payments faster – A shorter loan term means your loan is paid off faster. As a result, you’ll be able to start putting the amount of that monthly payment into your savings account much sooner.
However, there is one drawback to a shorter loan term. You will typically have higher monthly payments since you are paying off the loan more quickly. If one of your primary goals for refinancing is to free up additional cash in your monthly budget, a longer loan term may be a better option to pursue.
It’s also important to evaluate the other ways you can use that money each month. If you’re spending more of your monthly income on your car payment, you may not be able to contribute as much towards your retirement account, save for a vacation, or allocate funds to other items that are important to you. In some situations, paying off your loan faster may outweigh the ability to put money towards these other things. In other circumstances, you may prefer to choose a longer loan term and keep additional cash in your monthly budget.
What Is Considered a Long Loan Term for Auto Refinance?
In general, your refinanced auto loan will be considered a long-term loan if the repayment period is 60 months or more. The primary advantage of a longer loan term is a lower monthly payment. You’re able to get the lowest monthly payment possible with this option since you’re spreading out the total amount owed over a longer period of time. Longer loan terms are common when very expensive vehicles are refinanced. It’s also an excellent option if your primary goal is to free up more cash in your monthly budget.
However, this extra monthly cash comes with a variety of downsides:
Higher interest rates – Interest rates are often higher for long-term loans than short-term loans.
More money owed over the lifetime of the loan – This higher interest rate, when compounded with paying interest for a longer period of time, means you’re often paying a lot more interest on your loan. As a result, it can significantly increase the total amount you owe over the lifetime of your loan.
Greater risk of being upside down on your loan – Long-term loan options increase your risk of negative equity in your vehicle. This situation, often referred to as being upside down on your loan, occurs when you owe more on your loan than the vehicle is worth. If you’re upside down on your loan, there is a greater risk of defaulting or owing a significant cash payment in the event that your vehicle is totaled. You can guard against this risk by purchasing a GAP waiver, which provides additional coverage that will kick in if your insurance isn’t sufficient to pay off the balance of your loan.
While these downsides are all associated with significant financial risks, there are some situations where you may still want to refinance your car loan for a longer term:
A smaller monthly payment will free up additional cash in your monthly budget necessary to pay all your bills on time and avoid racking up additional debt.
You have other high interest debts that you need additional money in your monthly budget to pay off faster.
How Do I Determine the Right Loan Term When Refinancing?
Ultimately, there is no one right answer for everyone. The best loan term for your car refinance will depend on a variety of personal factors, including your monthly budget, your credit score, the age of your vehicle, how far you are into your current loan, and how long you are willing to carry car loan payments.
When comparing car loan refinance options, make sure to evaluate the loan term in addition to the interest rate. In general, the best case scenario would be to lower your interest rate while keeping the same loan term. This would allow you to save money each month and pay less money over the lifetime of the loan. The important thing is to crunch the numbers to see how much you’ll save from each loan option you’re evaluating. You can use our car loan refinance calculator to get a better sense of how much you can save for various interest rates and loan terms.
iLending Makes Car Loan Refinance Easy and Hassle Free
If you’re considering refinancing your car loan, iLending can help. Our exclusive You First Approach™ makes refinancing easy and hassle free:
You’ll be paired with a loan consultant who will discuss your goals for refinancing in detail.
We’ll shop around for you, comparing loan options from our network of over 50 nationwide lenders to identify the solutions that most closely align with your goals.
Your loan consultant will review the best options with you, answer any questions you may have, and help you pick the best one for your specific needs.
We’ll help you fill out all paperwork and follow up with your existing lender to make sure your current loan is paid off, giving you peace of mind that everything is being done correctly.
On average, customers save $145/month when they refinance a car loan with iLending. That equates to significant monthly savings that can be used to pay down debt, save for a big purchase, take a vacation, or just about any other financial need you may have.
Apply now to get the car loan refinance process started.
What would you do with an extra $143* in your pocket?
