How does refinancing a car work?

How does refinancing a car work?


Refinancing a car is the process of having your car loan paid off and replaced with a new one, often with a different lender, that has new agreed-upon terms.

There are various possible outcomes and, in many cases, it’s about saving money, though not always. Borrowers often look for a lower monthly payment, reduced interest rate or different loan duration, or a combination of these.

Let’s look at each in more detail.

3 potential outcomes of refinancing an auto loan 

  1. Lower monthly payments

Refinancing may lower the monthly car payment. This might be by reducing the interest rate or extending the duration of the loan, or both together. 

  1. Reduced interest rate

When a refinanced car loan comes with a lower interest rate than the current loan, it may reduce the total amount of interest paid by the time the loan amount is paid off, in cases where the loan term is not extended, or not extended by much. 

  1. Different loan term duration

Longer – Extending the loan means the loan amount will be paid back to the lender over a greater period of time, reducing the monthly payment needed to meet that sum. However, it might mean you end up paying more for your car in total, including interest charges, by the end of the loan term.

Shorter – A loan may also be refinanced to shorten the term, such as when a borrower is seeking to pay off the note more quickly and reduce the amount of interest paid. Depending on the interest rate, a shortened term may raise the monthly payment but reduce the total interest paid.

There may be transaction fees

Keep in mind that refinancing a car may involve transaction fees, charged by the lender, to be paid up front or rolled into the loan amount on which you will pay interest. This will form the annual percentage rate (APR) of the refinanced loan.

Use a refinance calculator to see what you might save

An auto refinance calculator can be used to estimate what refinancing a car may mean for your situation and what you might save. It enables you to enter the loan balance, monthly payment and APR of your current loan and compare it to the refinanced amount, loan term and APR of a potential new loan to estimate how monthly car payments and total interest payments will change.

Let’s say you took out a loan for $19,500, about the average price of a used car, with an APR of 7 percent and a monthly payment of $386.48 spread over 60 months.

You’re now 12 months into the contract and want to refinance for a lower rate. Having paid off a year’s worth of your loan, the current balance is $16,124.59. Using this as the amount you want to refinance, an APR now at 3.5 percent, and, because you don’t want to extend the overall amount of time you’re having to pay off the car, a loan term of 48 months, the calculator estimates the new monthly payment drops to $360.48, a saving of $26 a month.

But it estimates much larger interest savings in the long run. Whereas you would have paid $2,411.56 over the remainder of your current loan, the new interest charges total $1,178.45, a potential saving of $1,233.11.

Now see what may happen when the loan period is extended. If you decided you wanted to increase the loan period to 72 months in this example, the new monthly payment drops further to $248.62 for a monthly saving of $137.86, but the new interest charges total $1,776.05; a saving of just $635.51 on paying the $2,411.56 interest over the remaining part of your current note.


Interest charges by refinanced loan duration


You can see from the chart above how interest charges may vary when refinancing the same sum, with the same APR, for other loan durations, including going shorter to 36 months or opting for another 60-month term.

Search for different lenders to find good terms

When it comes to auto financing in general, the Consumer Financial Protection Bureau recommends shopping around for the best deal. When you apply for refinancing, you’ll typically have to provide the lender with some personal information to find out if you qualify and, if you do, what kind of rate they might offer. You can read more about that in our article “How do I refinance my car?

There’s no waiting period to refinance, and you can apply with bad credit*

Even if you recently bought a car with the help of a loan, there’s no time limit before you can apply for refinancing. So, if your credit has improved or market interest rates have dropped, you may want to take advantage. You can also apply for auto-refinance options with bad credit.

At RoadLoans, we accept applications from consumers with all types of credit. We don’t, however, accept applications to refinance a loan from existing Santander Consumer USA and Chrysler Capital customers.

As an online direct lender, RoadLoans’ application is quick and easy and, if approved, the process is straightforward.

It’s common for people who are new to financing to ask how refinancing a car works, and it’s a question well worth asking. Taking the time to understand the process may help you find an auto loan with better terms for your situation.

Apply for auto refinancing and see if you can save.


These statements are informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

 RoadLoans is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.

* “Bad” or “Poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press),,, Investopedia, and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by and Santander Consumer USA.


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