Auto Loan Refinance

Refinancing is the payment of one’s current loan using a new loan from another lender. The new lender pays off the old loan and the customer makes his/her loan payments to the new lender.

Customers are usually offered lower interest rates as well as lower monthly payments when refinancing. Because interest rates fluctuate, it is a good idea to shop around for lower competitive rates, especially within the first year of obtaining that car loan. You could end up saving a whole lot of money by the time the loan is paid off.

While auto refinancing has its own advantages, it is not without disadvantages. It is important to understand both when considering refinancing your auto loan.


Refinancing helps you save money by lowering the interest rate. A lower interest rate is usually the first consideration for anyone looking to refinance an auto loan. If rates have gone down since you purchased a vehicle, it is prudent to shop around and see if you can refinance your auto loan, of course at a lower rate. This saves you money in the long run. And even more savings if you refinance during the early part of your term, when most of your payments go to the interest payment. It can also help you pay off your car loan earlier because of the reduction in the overall interest.

Also, most of the time, your payments are likely to be lower when you refinance. This is especially the case if your new loan is extended beyond the initial loan payment schedule. The basic advantage with this kind of arrangement is that it helps reduce the total monthly expenses, especially for those who are working on tight budgets. Plus, you will have some more money to pay for other debts (which might have a higher interest), take care of other unexpected expenses or sending in an extra amount towards your loan, without exceeding your income.


Refinancing may not save the consumer any money in the long run, if the loan period is extended beyond the original schedule. Most customers are attracted to the new lower payments, without paying attention to how long they have to pay the loan. Unless there is a big difference between the new and the old interest rate, one could end up paying more money than on the original loan. But this can be prevented if you strive to pay more than the required monthly payment, thus bringing you closer to paying off the loan earlier, hence the savings.

Fees: Sometimes, a customer might incur lien holder fees, re-registration fees, or in very rare cases, early payment penalties. These are very negligible though (somewhere less than $100 for lien holder and re-registration fees), which you can save on the new loan after about three payments.

Temporary reduction in the credit score, because in the search for auto refinancing, the lender will check your credit score, which will lower your score by a few points. But this should not be a big deal, as the points will shoot up again when you continue making payments.

Staying in debt a little longer. When one’s payment is extended because of the newly refinanced loan, it keeps the customer in debt longer than it should have taken.

All in all, it is wise to refinance if you will be getting a better interest rate. To realize the benefit of refinancing however, you should try to pay more than the minimum monthly payment and pay it off earlier than anticipated.