Does Refinancing a Car Save Money?

You may not be happy with the amount of your monthly car payment or how long you have until the loan is paid in full. One option worth considering is to refinance your remaining balance into another car loan. Depending on the situation, pursuing this strategy may or may not end up saving you money in the long run.

Reducing Payments

Perhaps you are having difficulty making your monthly car payment and are considering refinancing to lower the payment amount. Unless you refinance to a much lower interest rate, you are simply extending the term of the loan in exchange for the smaller payments. As a result, you might actually end up paying more in interest over the long haul, even though you are reducing the amount you pay each month, and you'll be in debt longer.

Insurance Expense

Whenever you finance a vehicle, your lender will require you to carry comprehensive and collision insurance coverage with specific deductible amounts until the loan is repaid in full. If you extend your payment term by refinancing, you also extend the period you need to maintain comprehensive and collision on the vehicle, even though the vehicle's continuously diminishing value makes carrying these coverages less cost effective as the years go by. In many cases, comprehensive and collision make up 50 percent of a total car insurance premium.

Cashing Out

If you owe less on the car than it is worth, refinancing can provide a quick source of additional cash. For instance, if you owe $5,000 on a vehicle with a book value of $7,000, you can refinance the vehicle for $7,000 at a lower interest rate and receive $2,000 in cash when you pay off your old loan. You can make the transaction more lucrative by placing the cash in an investment instrument of your choice.

Lower Interest Rate

Refinancing your auto loan saves you money when you receive a lower interest rate without extending your payment terms or increasing your existing balance. Maybe you originally purchased the vehicle at a time when interest rates were high or credit problems forced you to accept a loan with a high rate. If after a year or two interest rates have fallen or you took steps to improve your credit score, refinancing to a lower rate can be to your benefit.