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.
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:
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.
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:
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:
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.
If you’re considering refinancing your car loan, iLending can help. Our exclusive You First Approach™ makes refinancing easy and hassle free:
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.