Auto Loan Refinance Calculator

Costs Of Refinancing Auto Loans

Whether it is because your credit score has improved or market interest rates have fallen, you might be considering refinancing your auto loan to save some money. While refinancing your auto loan might save you money, refinancing is not free. Here are some things to consider as you weigh the costs of refinancing against the benefits.

If you are currently paying a high interest rate on your auto loan, refinancing into a loan with a lower interest rate is probably a good idea. In general, the cost of refinancing should be relatively small. Do some research by checking the interest rates and refinancing fees offered by a couple of different lenders.

• Application and Origination Fees: Lenders have to take time to process your loan application, check your credit, and complete lots of paperwork in order to underwrite your auto loan. Some lenders charge application and origination fees to compensate them for some of those expenses. Most lenders, however, do not charge any type of application and origination fees at all. It pays to get quotes from more than one lender before refinancing your auto loan to make sure that you are not paying too much.
• Interest Rates and Points: A loan offer with a lower interest rate may not save you as much money as you expect if the loan has points attached to it. One point is equal to 1% of the loan amount. Points either need to be paid up-front at closing or get rolled into the loan amount. When a loan has points, the effective cost of borrowing is always higher than the stated contract rate. If a lender offers you 8% with 3 points, the actual effective cost to you ends up being higher than 8%. The greater the number of points, the higher your effective borrowing cost will be. In some cases, you could end up paying more by refinancing into an auto loan with points.
• Statutory Fees: Statutory fees include items like state registration, title transfer, and lien transfer fees. The amount of these fees varies by state, but they are generally modest.
• Loan Term: Although the loan term is not a fee, it is a driver of your overall loan refinance costs. Choosing a longer loan term when you refinance your loan saves you money on your monthly payment. It may, however, cause you to pay more money in interest and raise the total cost of the car. You’ll need to consider if the monthly savings or additional interest is more important in your current financial situation. For example, if you borrowed $25,000 for 36 months at a rate of 10%, your monthly payment is $806.68. After one year, you refinance your remaining balance of $17,481 at a rate of 8%. If you take out a loan for 24 months to match the remaining maturity on your existing loan, your monthly payments are $790.64 with total interest payments of $1,494. If you take the loan out for 36 months, your payment falls to $547.80, but you pay a total of $2,239 in interest. So, in this example, you incur an additional $745 in interest expenses by extending your loan term.

When An Auto Loan Refinance Makes Sense

As interest rates begin to rise, you might be wondering if it is time to refinance your auto loan. Although you can’t get the same long-term benefits from refinancing your auto loan that you can get from refinancing your home loan, it can still help you save some money. Here are a few things you consider before refinancing your auto loan.

When you should consider refinancing:

• Your credit score has improved: If you didn’t have a significant credit history at the time you got your auto loan, you might notice that your credit score has improved by making your auto loan payments on time every month. This is especially true if this is your first auto loan. Alternatively, you may have paid off a lot of credit card debt since you got your auto loan. Lenders reserve the best interest rates for borrowers with the best credit scores, so you may be able to get a lower interest rate with your new, higher credit score.
• You need a lower payment: There are two ways you can reduce your monthly payment by refinancing your auto loan. One way that you can lower your payment is by getting a loan with a lower interest rate. You should be able to secure a lower rate if there have been substantial improvements to your credit score. Another way that you can lower your payment is by extending the maturity on your loan. For example, if you choose a loan with a maturity longer than your current remaining loan term, your payment will be lower. So, if you had a loan with a 60-month maturity and get a new loan with a 60-month term after you’ve made a few payments, your monthly loan payment will be smaller (all else being equal).

When you should not consider refinancing:

• You owe more than the current market value of the car: Check the current market value of your car by going to KBB.com, Edmunds.com, and AutoTrader.com. Lenders are less likely to let you refinance your auto loan when you owe more than the current market value of the car. The vehicle serves as collateral for the auto loan, and the lender can offer lower interest rates because the risk of loss is lower than it would be for an unsecured loan. If the loan balance is greater than the value of the car, however, the lender might not recoup the outstanding balance if the borrower defaults on the loan.
• You got a special incentive rate for financing with a dealer: Many car manufacturers offer special below-market financing rates as marketing incentives. They advertise financing deals with 0% or very low interest rates on new cars to get buyers to choose their cars over those of another manufacturer. If you bought your car with one of these special incentive financing rates, it’s not likely that you’ll be able to get a lower interest rate by refinancing your auto loan.
• Refinancing your auto loan may be a good way to save money if you can get a lower interest rate or want to extend your loan maturity. Lenders, however, may not be willing to approve your loan request if the car is more than 7 years old or you owe more than the current value of the car. Finally, you should keep in mind that refinancing an auto loan is not free. Consider all the costs when making your decision.