How Auto Loan Refinancing Can Save You Money on Your Car
If you’re looking for ways to cut costs or improve your financial outlook, refinancing your auto loan might be an option worth exploring. It can lead to a lower interest rate, reduced monthly payments, or a shorter loan term, each of which can offer real financial benefits.
What Is Auto Loan Refinancing?
Refinancing an auto loan simply means replacing your existing loan with a new one—usually with different terms, a new interest rate, or a new repayment timeline. Most people refinance with the goal of saving money, whether by reducing total interest paid, freeing up space in their monthly budget, or paying off their loan faster.
Lower Interest Rates Mean Long-Term Savings
One of the most common reasons people refinance their car loans is to secure a lower interest rate. If your credit score has improved since you bought your car, or if overall auto loan rates have dropped, refinancing can reduce the amount of interest you pay over the life of the loan. Even a small decrease in your rate can lead to significant savings, especially if you have several years left on your loan.
Lowering your interest rate without extending the term of your loan typically leads to the most savings. You’ll pay less in interest and may pay off the loan faster if you keep making the same monthly payments as before.
Refinancing for a Shorter Term
If your financial situation has improved, you might also consider refinancing to a shorter loan term. For example, going from a 60-month loan to a 36-month loan can save you a considerable amount in interest. Your monthly payment will likely go up, but you’ll eliminate the debt more quickly and pay less over the life of the loan.
This option is best for borrowers who can comfortably take on a higher monthly payment without putting strain on their budget. It’s a smart move for anyone trying to get out of debt faster or preparing for a future purchase like a home.
Refinancing to Reduce Monthly Payments
In some cases, the goal of refinancing isn’t long-term savings; it’s short-term breathing room. Refinancing into a longer loan term spreads your remaining balance over more months, which lowers your monthly payment. This can make sense if your income has dropped, your expenses have gone up, or you simply want to free up cash in your monthly budget.
However, it’s important to understand the trade-off. Stretching your loan term usually means you’ll pay more interest overall, even if the rate is slightly lower than your original loan. You’ll owe less each month, but the total cost of the loan will likely increase. For borrowers choosing this route, it’s less about saving money in the big picture and more about staying financially flexible in the present.
Additional Reasons to Consider Refinancing
Getting a reduced rate and saving on interest payments or reducing your monthly payment aren’t the only benefits of refinancing. The process can also give you the opportunity to:
Remove a co-signer from the loan if your credit has improved enough to qualify on your own.
Change lenders if your original lender’s customer service or payment options aren’t working for you. For example, if you originally got your auto loan through a dealership but you’d prefer to have your loan with the credit union where you bank, refinancing is likely a good idea.
Consolidate debt by using equity in your vehicle. This option isn’t always available and comes with its own risks. You may benefit from discussing your situation with a credit counselor or financial coach before going down this path.
When Refinancing Might Not Make Sense
Not all auto loans are worth refinancing. If your car has significantly depreciated or you’re nearing the end of your loan term, the savings may not justify the time and fees involved. Some lenders also charge prepayment penalties (more common with dealership-arranged loans than bank or credit union loans), so it’s important to review the terms of your current loan before refinancing. A loan officer at Ouachita Valley FCU can help you review your current loan.
Is Now the Time to Refinance Your Auto Loan in Northeast Louisiana?
If your primary goal is to save money, refinancing your auto loan with a lower interest rate and shorter term is the best approach. Extending the loan term can help with monthly affordability, but it typically costs more in the long run.
Ouachita Valley FCU is here to help car owners in Monroe, West Monroe, and the Ouachita Parish area run the numbers and find the car loan refinancing option that makes the most sense. Call us at 318.387.4592 to speak with a loan officer or learn about membership.
