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Seeing that your credit score has increased can be a real pick-me-up. It’s also a sign that you may qualify for an auto lender’s lowest interest rates. But how much lower should your rate be to make refinancing worth it? Is it worth refinancing a car for a 1 percent drop? In many cases, yes.
However, as with any auto loan refinance, you’ll need to run the numbers to be sure. Loan application fees and other refinancing costs could eat into your savings. Extending your loan terms could also offset the lower rate. Learn how to know when it’s worth it to refinance your car.
Car refinance rates can have a big impact on the money you save when you refinance a car loan. The bigger the difference between your current rate and your new rate, the more you could save.
For example, let’s say you borrowed $40,000 to buy a new car with an interest rate of 8%. With a five-year term, your monthly payment is $811.06 and you’d pay $8,663.35 in total interest over five years. But what if you refinanced after a year to a four-year loan with a 7% rate? You’d save almost $750 in interest.
The chart below shows the effect that refinancing for 1% less could have on your loan, with your loan payoff date staying the same. After a year of on-time payments, you’d have already paid $2,955.07 in interest and you’d be refinancing a balance of $33,222.40.
However, if you were to refinance into a new five-year loan, you’d effectively stretch out the overall time it takes to pay off the car from five years to six years (since you’ve already been making payments for one year).
In this case, a 1% lower rate but extending your payoff date by one year would actually increase the amount of interest you pay by more than $500. After a year of on-time payments, you’d have already paid $2,955.07 in interest and you’d be refinancing a balance of $33,222.40.
When you’re looking at car refinance rates that are 1% lower than your current rate, it can definitely be worth it to refinance in certain scenarios, such as:
However, it probably won’t be worth it to refinance for a 1% lower rate if:
There’s one instance where it depends on your goals to know whether or not refinancing is worth it: refinancing into a longer loan term. You’ll probably pay more in interest, but your monthly payment will be smaller, which could be useful if your budget is tight.
If you can get an interest rate that is 2% lower than your current rate, you’ll likely find it worth it to refinance. The bigger the difference in rates, the more you can save. You’ll need to do the math to know for sure. But typically, it’s worth it to refinance a car for a 2% lower rate.
The best way to know whether a refinance is worth it is to look at the numbers and compare. You may be able to lower your monthly car payment, save money on interest, or both. Use RefiJet’s auto loan refinance calculator to get an estimate of how much you could save, and fill out our quick online application to see your personalized car refinance rates and loan options.
RefiJet’s online resources show you what you need to know before refinancing, including how much your car payment should be by income and how the refinance process works. Get started today to see what your new auto loan could look like.
Take a look at the questions below to help you decide whether it’s worth it to refinance for a lower rate.
If you can save money by lowering your interest rate, then it’s worth refinancing. Use a refinancing calculator to know exactly how much you could save. Refinancing can also be worth it if it lowers your monthly payment, especially if you’re struggling with a high car payment.
Both methods can help you save money, so you’ll need to consider how fees will factor into your decision by running the numbers. You could also combine both methods to pay the loan off early and save more on interest, too.
It depends. Some lenders charge prepayment penalties if you pay the loan off early, but it's not common. Others charge fees such as origination fees or recording fees when you refinance, so always check your loan offers to see the costs of refinancing your car.
You generally don’t need a down payment to refinance an auto loan. However, there are some cases when a lender might require it, such as if your car is worth less than the loan amount.
Typically, the refinancing process goes like this: You’ll apply for an auto refinance loan and provide proof of income and identity. Once you’re approved, you can use the proceeds of the new loan to pay off the old loan. Then all you need to do is make payments on your new loan. Learn more about the auto refinancing process with our guide.
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