How does refinancing a car work?

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

There are various possible outcomes and, in many cases, it’s about saving money or otherwise finding a more affordable loan. Borrowers generally look for a lower monthly payment, reduced interest rate, different loan duration or a combination of these. Let’s look at each in more detail.


How does refinancing a car work?


3 Potential outcomes of refinancing an auto loan


1. Lower monthly payment

A lower payment could result from dropping the interest rate, extending the duration of the loan, or both together.


2. Lower interest rate

When a refinanced loan comes with a lower rate than the current note, it may reduce the total interest paid over the life of the loan, in cases where the term is not extended or extended by much. Interest rates will vary according to the lender, market rates and factors like a borrower’s credit score.


3. Different loan duration

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

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


There may be transaction fees

 Keep in mind 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 may save

An auto refinance calculator is a handy way to estimate what refinancing a car may mean for you. 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 auto 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 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 $16,125. 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 monthly payment drops to $360, a saving of $26 a month.

But it estimates much larger interest savings in the long run. Whereas you would have paid $2,409 over the remainder of your current loan, the new interest charge is just $1,179, a potential saving of $1,230.


Interest charges by refinanced auto loan duration


You can see from the chart above how interest charges vary when refinancing the same sum, with the same APR, for other loan durations, including going shorter to 36 months, opting for another 60-month term or extending to 72 months.


Find a good lender to get the best terms

The general advice for getting a good auto financing deal is to shop around. Applying is often free and 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 will offer. You can read more about that in “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 to refinance. So, if think you didn’t get the best deal first time around or your credit score has improved, you may want to take advantage. You can also apply for auto-refinance options with poor credit.

At RoadLoans, we accept applications from consumers with all credit types, including bad credit, although we do not accept applications to refinance a loan from existing Santander Consumer USA and Chrysler Capital customers.

Applying online is quick and easy. It takes a few minutes to complete our secure application and you’ll get an instant decision. If approved, the process is straightforward, too – just complete and return the forms and let us take care of the rest.


A better way to move forward

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, and enjoy a more comfortable journey to vehicle ownership.

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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