Refinancing a car loan
Refinancing means a new lender pays off your car loan and you pay the new lender instead, ideally at a lower rate. Done right, it can save real money. Done wrong, it lowers your payment and raises what you pay in total.
When it can help
- Your credit has improved since you bought the car.
- Rates in general have come down since you took the loan.
- You took dealer financing without shopping, and the rate was high for your credit.
- You can keep the same payoff date, or an earlier one.
When it usually does not
- You are near the end of the loan. Most of the interest is already paid.
- You are upside down. Many lenders will not lend more than the car is worth, or will ask you to pay the difference. The lesson on being upside down shows how to check.
- The fees, or a penalty for paying off the old loan early, eat up the savings.
The trap: stretching the term
A refinance offer often leads with a lower payment. Sometimes that comes from the lower rate. Often it comes mostly from starting a new, longer loan. A longer loan means more months of interest, so it can cost more in total even at a lower rate.
Worked example
One loan, two ways to refinance
- Original loan
- $25,000 at 12% for 60 months
- Payment now
- $556.11
- Still owed after 18 payments
- $18,995.73
- The 42 payments left, if you keep it
- $23,356.62
- Refinance fees
- $200
Swipe the table sideways to see every column.
| Payment | New payments plus fees | Against keeping the old loan | |
|---|---|---|---|
| 42 months, same end date | $511.25 | $21,672.50 | $1,684.12 less |
| 72 months, stretched | $323.86 | $23,517.92 | $161.30 more |
The stretched loan cuts the payment by $232.25 a month, which feels like a win. But you would make 30 more payments than you have left now, and pay $161.30 more in total than if you had done nothing, even at a rate 5 points lower. Keeping the same end date is what saves the money.
Rates, prices and values here are for example only. Payments use the standard loan formula, rounded to the cent.
The costs to look for
- Lender fees. Some lenders charge to set up the loan. Ask for every fee in writing.
- Title fees. Your state may charge to put the new lender on the title.
- A prepayment penalty on the old loan. Check your contract.
- Extras sold again. A new loan can come with a new pitch for GAP or a service contract.
If you bought GAP with the old loan, it usually ends when that loan is paid off. Ask the seller whether you are owed a refund for the unused part, and decide whether you need GAP on the new loan.
How to compare offers
- Get the payoff amount on your current loan, and check your contract for a prepayment penalty.
- Get offers from two or three lenders within 14 days, so the credit checks count as one shopping trip. The lesson on getting a loan offer explains how scores treat this.
- Ask each lender for the APR at a term that ends when your current loan ends, or sooner.
- Add up what is left on the old loan: the payment times the payments left. Compare it with the new payment times the new number of months, plus every fee.
- Pick the lowest total, not the lowest payment, and read the new contract before you sign.
What to do next
- Find your current APR, payment and number of payments left on your statement.
- Ask your lender for the payoff amount.
- Get refinance offers at the same or a shorter term, within 14 days of each other.
- Compare totals, fees included, and keep the old loan if the savings are small.
- Run both loans in the payment calculator.
Sources
Try your own numbers
Payment calculator
Your payment, the total, and how long you would be upside down.
Dealer offer X ray
The real APR, the lines you can say no to, and money the sheet hides.
Out the door price
Every fee and tax in one total, and up to three dealers side by side.
Compare a rate before you refinance
Ask your bank or a credit union what they would offer on what you still owe, then set it against your loan’s rate and payoff date.
Education, not financial or mechanical advice. Have any used car checked by a mechanic you trust before you buy.