Should You Refinance Your Auto Loan?
Refinancing your auto loan can save you real money, but only if the numbers work in your favor. The key is comparing your current interest rate to available rates and calculating your break-even point.
When Refinancing Makes Sense
You should consider refinancing if:
- New rates are 0.5% to 1% lower than your current rate
- You have at least 24 months left on your loan
- Your credit score has improved since you got the original loan
- You plan to keep the vehicle for at least another year
Refinancing typically costs $50 to $300 in fees. These upfront costs are why a smaller rate drop might not be worth it.
Calculate Your Break-Even Point
Here's how to find out if refinancing pays off:
- Get your current loan balance and interest rate
- Get quotes from at least three lenders for a new rate
- Calculate the difference in your monthly payment
- Divide refinancing fees by your monthly savings
Example: If refinancing costs $200 and saves you $35 per month, you break even in about 6 months. After that, you pocket the savings.
Real Savings Numbers
Owners who refinance at a rate 1% lower typically save:
- $100 to $150 per month on a $25,000 loan
- $1,200 to $1,800 per year
- $2,400 to $3,600 over two years
On average, financing charges run $1,131 per year on a typical 60-month auto loan. A lower rate directly reduces this cost.
Watch Out for These Traps
Don't refinance if you:
- Extend your loan term to get a lower monthly payment (you'll pay more interest overall)
- Need the cash upfront and would tap a high-interest credit card to cover fees
- Are planning to sell or trade the vehicle within 6 months
- Have a rate below 3% (fewer lenders can beat that)
Action Steps
Start by contacting your bank, credit union, and online lenders for refinancing quotes. Request the same loan length as your current loan to keep payments stable. Compare the monthly savings to refinancing fees to find your true break-even date.
If you're not sure whether refinancing makes financial sense for your specific situation, tools that analyze your full vehicle ownership costs can help you see the real impact on your budget.