Is Refinancing Your Car Loan Actually Worth It?
Refinancing your auto loan is worth it when the total interest you save is larger than the cost of making the switch. A lower monthly payment on its own does not prove anything. You can lower your payment and still pay more money overall.
That gap between a smaller payment and real savings is where most people get tripped up. This guide shows you how to run the numbers yourself in about ten minutes.
What refinancing actually does
Refinancing replaces your existing car loan with a new one. The new lender pays off your old balance. You then make payments to the new lender instead.
The car does not change. Your title does not change hands. Only the loan terms change, which usually means a new interest rate, a new term length, or both.
People refinance for three reasons. Their credit has improved since they bought the car. Rates have dropped. Or they took dealer financing in a hurry and never shopped it.
That third reason is more common than most people expect. Dealership financing is convenient, and convenience often costs money.
Why a lower payment can still cost you more
Here is the trap. Your monthly payment depends on two things: your interest rate and how long you have to pay.
Stretching a loan from 36 months to 60 months will lower your payment even if your rate goes up. The payment looks better. The total cost is worse.
So the number to watch is not your monthly payment. It is the total interest you will pay from today until the loan is gone.
The five step break even calculation
1
Find your payoff balance
2
Count your remaining interest
3
Calculate the new loan the same way
4
Subtract the costs of switching
5
Compare
A worked example
These figures are for illustration only. They are not PFCU rates. For current rates, see our auto loan rates page.
Say you owe $18,000 with 48 months left at 11.9 percent. Your payment is roughly $473.
Over those 48 months you would pay about $22,704 in total. Subtract the $18,000 balance and you are looking at roughly $4,704 in remaining interest.
Now say you refinance the same $18,000 over the same 48 months at 7.9 percent. Your new payment is about $439.
Total paid drops to roughly $21,072. Interest falls to about $3,072.
You save around $1,632 in interest. Subtract about $30 in lien and title costs and you keep roughly $1,600.
Your payment also drops by $34 a month. But the $1,600 is the real number. The $34 is just how it arrives.
The same example, done wrong
Now watch what happens if you stretch the term to chase a smaller payment.
Same $18,000, same 7.9 percent, but over 72 months instead of 48. Your payment falls to about $315.
That is $158 less every month than you pay today. It feels like a clear win.
But you now pay about $22,680 over the life of the loan. Interest climbs to roughly $4,680, which is almost exactly what you were already going to pay.
You dropped your rate by four points and saved almost nothing. The longer term ate the entire benefit.
This is the single most common refinancing mistake. Keep your term the same or shorter unless you have a specific cash flow reason to extend it.
When refinancing usually does not make sense
You are near the end of your loan.
You owe more than the car is worth.
Your rate is already competitive.
Your credit has dropped since you bought the car.
Details people forget
Check for a prepayment penalty.
Ask about refunds.
Shop within a short window.
Keep paying until it clears.
Frequently Asked Questions
There is a small, temporary dip from the hard inquiry and the new account. Most scores recover within a few months of on time payments.
The title has to transfer to your original lender first, and that typically takes 60 to 90 days. Most lenders will not consider an application before the title is processed. Some require six months of payment history, so ask rather than assume.
Sometimes. It depends on how far upside down you are and the lender's loan to value limits. Talk to a lender rather than assuming the answer is no.
No. If you shorten your term, your payment can rise even at a lower rate. You pay less interest overall but more each month.
No. You can refinance with any lender you qualify with, and shopping around is the entire point of refinancing.
Yes, but membership is open to more people than the name suggests. See our membership qualifications to check whether you already qualify.
Where a credit union fits
Credit unions are owned by members rather than shareholders. That structure is why credit union auto rates are often lower than what a dealership offers on the same vehicle.
At Policemen’s Federal Credit Union, our lending staff walk through this math with members before anyone signs anything. If the numbers do not work, we tell you.
You can check our current auto loan rates, run scenarios with our financial calculators, or start a refinance application.
Not sure whether you are eligible to join? Membership is open to more people than the name suggests. See our membership qualifications or call us at (574) 234-1524.
