Yes, refinancing an auto loan starts you over with a new loan. The new loan usually has a different rate and term, which can be a better fit for your financial situation.
Why refinancing starts your loan over
When you refinance your car loan, your new lender pays off your old car loan and starts a new loan with different terms.
Even though refinancing technically gives you a new loan, the term might be shorter than your previous car loan. So you can refinance an auto loan and still pay it off faster than you would have with your current loan.
Whether you want a new loan term that is shorter, longer or similar to what was remaining on your original loan depends on your reason for refinancing.
A shorter term might help you pay off your loan faster with a lower interest rate.
A longer term will cost you more over the whole loan but will lower your monthly payment right now.
You don’t have to take out a longer loan
Your new auto loan can end at the same time that your current loan would be paid off.
In the example above, the refinanced loan had a lower interest rate but added a year to the loan (five years instead of four).
If you refinanced the same loan at the same new interest rate for four years instead of five, your monthly payment would be around $653. You’d save about $1,282 in interest, which isn’t as much savings each month but more savings over the whole loan.
In this case, refinancing would save you money because of the new interest rate, even though you’ll pay off the new loan at the same time you would’ve paid off your old loan.
When can you replace your current auto loan?
Lenders have different requirements for when you can refinance your auto loan. Some lenders won't refinance a car loan until it has been open for six months or more. Other lenders have no set waiting period after you’ve purchased a car.
However, lenders can’t refinance until your current lender receives the car’s title from the manufacturer or previous owner, which can take several months.
Refinancing earlier in a loan can save you more money
Some lenders may also require a certain amount of time remaining on your loan before you can refinance. It's best to have at least two years remaining on an auto loan to get the most savings from refinancing because you pay more interest early in a loan term. You’re unlikely to save as much if you refinance too late in the term.
Refinancing a car loan is typically quick. Some lenders can approve and fund the loan the day you apply.
When should you consider an auto refinance loan?
You may benefit from auto loan refinancing in these situations:
Your finances have improved and your credit score has increased since taking on a car loan.
Auto loan interest rates have decreased since you first got your loan.
You took a higher-rate loan at a dealership and think you could qualify for a better rate with a different lender.
You're having trouble making your monthly auto loan payment. Refinancing to a longer term can reduce your payment, but you could end up paying more interest over the life of the loan.
Refinancing is an opportunity to start over with your loan, so take the time to shop lenders and find the best auto refinancing with the lowest rate. Once you have all of your offers, you can use our auto loan refinance calculator to compare and find the auto loan that will benefit you the most.
