How Much Can Auto Loan Refinancing Save Me?

Car and home purchases are typically the largest purchases that most people will ever make. Because of the cost of the average home or new car, most consumers take out a loan to cover all or part of the cost. Both types of loans can take a long time to pay off, with terms anywhere between 24 and 72 months — sometimes longer. These payments can be a drain on your finances.

If you are currently paying off a vehicle loan, car loan refinancing can help you save money over the length of your repayment period, in the form of lower monthly payments, or both. How much money you save depends on your goals, current interest rates and your creditworthiness.

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What Is Auto Refinancing?

Auto refinancing, also known as a “refi,” is the process of changing the terms of your current car loan. If your refinancing application is approved, your lender issues you a new loan that replaces the one you had. The differences are in the loan terms. For example, you could refinance your auto loan through SCCU when interest rates are lower than what they were when you took out your original loan. Over time, you’ll save money as you repay your balance at the lower rate. You might also be able to shorten or lengthen the amount of time over which you’ll need to make payments.

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Understanding Your Savings

When considering a refi, it’s important to determine what your goals are. If you are looking to reduce the amount of money you pay over the length of your loan, you’ll either want to reduce the interest rate that you were locked into when you first entered into the auto loan financing process, reduce the number of payments left on your loan (even if it means making higher monthly payments) or both.

On the other hand, if you are dealing with financial issues and need to free up some cash every month, you might want to refinance so that the length of your auto financing agreement is longer, with smaller payments each month. If you can’t secure an interest deduction with this type of refi, you may pay more over time than you would have with your original financing deal. However, since your payments are smaller, you’ll have more cash each month.

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Factors That Influence Savings

The amount of money that you can save depends on multiple factors, including:

1. Current interest rates: Current interest rates have a huge impact on the cost of your loan. If interest rates were high at the time that you signed your original contract, but have gone down since then, refinancing could save you money.
2. Your credit score: Credit scores affect the loan rate and length that a lender offers you. If your credit score has improved since you were approved for your current loan, you may find that refinancing now will get you better terms.
3. Loan length: In many cases, the fewer payments you make, the more money you save over time. However, if you are refinancing to free up cash for your monthly budget, a longer loan term might provide you with lower monthly payments. 
4. Lender fees: Lenders often charge fees when you apply for a loan. These fees vary, but you’ll want to factor them in when you are calculating the cost of refinancing your vehicle.

To get an idea of what you might be able to save, try using a refinance car loan calculator to determine what your savings and monthly payments might be. Be prepared to provide the balance left on your loan when you use one of these calculators.

Another thing to keep in mind is that while your credit does have an impact on loan approval and terms, it isn’t the only factor. Refinancing may be available to even those who are rebuilding their credit. 

Savings Examples

Here is an example of the kind of money you might be able to save through refinancing:

At the time you took out your current auto loan, you had some credit issues. Your APR is 10 percent and you are paying $634.06 a month with a remaining balance of $25,000 and 48 months left on your loan. If you fulfill your current loan terms, you’ll pay $30,434.88 over the rest of your loan term. 

However, you’ve worked hard to repair your credit and interest rates have gone down quite a bit. You find yourself eligible for a rate of 3.24 percent. You elect to keep the same loan length. Your monthly payment will drop to $556.01 each month, freeing up $78.05. Over the length of your loan, you’ll only pay $26,688.48, a savings of $3,746.40. 

Everyone is different, of course, so it is worth it to do some research, run some numbers and check your options for refinancing. You may be able to save money long-term while also reducing your ongoing expenses.