When to Refinance a Car Loan, and When Extra Payments Are Better
Refinancing replaces your car loan with a new one, ideally at a lower rate. It is often sold on the monthly payment, and that is exactly the number that can mislead you. The question that matters is whether you pay less in total. The refinance calculator answers it for your loan.
The three numbers to compare
- What you still owe on the current loan: your remaining payments added together.
- What the new loan will cost: its payments added together, plus any fees you pay upfront.
- The difference. If the first is bigger, refinancing saves money.
The CFPB makes the same point about any auto loan: look at "the annual percentage rate, the interest rate, the length of the loan, and the total amount financed," because other factors "have more impact on the total costs you'll pay over the life of your loan" than the monthly payment.
The term trap
A refinance offer can lower your payment in two ways: a lower rate, or a longer term. Only the first saves money. Stretching the term spreads the balance over more months, and as the CFPB notes, with a longer loan "you'll ultimately pay more in interest over the life of the loan."
On the calculator page, a $22,000 balance at 9.5% with 48 payments left, refinanced to 6.5% for the same 48 months, saves over $1,100 after fees. Refinanced to 6.5% for 72 months, the payment drops by much more, but the loan ends up costing more than keeping the old one. Keep the new term no longer than the payments you have left, unless you genuinely need the lower payment and accept the cost.
A longer term has a second cost: the CFPB notes that "longer loans are more likely to result in your owing more than the vehicle is worth."
When refinancing is likely to pay off
- Your credit score has improved since you took the loan.
- Rates have fallen, or you took the dealer's financing without comparing it to a bank or credit union.
- You have a meaningful amount of the loan left, so a lower rate has time to work.
- Fees are small enough that the lower payment repays them within a few months.
Shopping for a refinance without hurting your credit
Get quotes from several lenders, including credit unions. The CFPB says shopping for an auto loan "will generally have little to no impact on your credit score(s)," and that lenders' credit checks "will generally only count as a single inquiry if they're made within 14 to 45 days of each other." Do your comparison shopping inside that window.
Before you apply, get a payoff quote from your current lender and check the contract for a prepayment penalty; the CFPB notes some loans have one.
When extra payments are the better tool
If you cannot get a meaningfully lower rate, or the fees eat the savings, paying extra on your current loan is a guaranteed way to pay less interest. Every extra dollar goes to principal (ask your lender to apply it that way), so it stops collecting interest for the rest of the loan.
On a $22,000 balance at 9.5% with 48 payments left, $100 extra each month finishes the loan 8 months early and saves more than $800 in interest. A one-time $2,000 payment does about the same. The extra payment calculator shows your own numbers.
The two also combine well. If you refinance to a lower rate and keep paying your old, higher payment, the difference all goes to principal and the new loan ends sooner.
Sources
- CFPB, How do I compare auto loan offers? (last reviewed January 2024)
- CFPB, How will shopping for an auto loan affect my credit? (last reviewed January 2024)
- CFPB, Should I trade in my car if it's not paid off? (accessed October 2026)
This article is general information, not financial advice.