Whether a new rate is worth the swap
Refinancing a car loan replaces the existing balance with a new loan at a new rate. Unlike a mortgage there are rarely closing costs, so the decision is simpler: does the payment fall by enough to justify the paperwork?
The formula
Run it twice — once with the old rate and remaining term, once with the new — and compare both the monthly figure and the total interest still to be paid.
Worked example: $25,000 remaining at 6% over 5 years
- Payment: $483.32
- Total interest: $3,999
- Total paid: $28,999
Now the same balance at rates you might be offered:
| Rate | Payment | Total interest | Saved |
|---|---|---|---|
| 6.0% | $483.32 | $3,999 | — |
| 5.0% | $471.78 | $3,307 | $692 |
| 4.0% | $460.41 | $2,625 | $1,374 |
| 3.0% | $449.22 | $1,953 | $2,046 |
Each point of rate is worth roughly $690 over the remaining term. That is the number to weigh against an afternoon of applications.
The trap: resetting the term
Most refinance offers quote a fresh 60-month term. If you are two years into the original loan, that turns a three-year remaining obligation into a five-year one.
The payment falls dramatically — and total interest can rise even at a lower rate, because you are borrowing for longer. Ask for the remaining term, not a new full term, and compare total paid rather than the monthly figure.
When refinancing usually works
- Your credit score improved materially since the original loan
- The original loan came from a dealer at a marked-up rate
- Market rates have fallen since you bought
It usually fails when the car is worth less than the balance, because lenders will not refinance above value, and in the final year of a loan, where almost all remaining payments are principal and there is little interest left to save.
What this calculator leaves out
Title transfer fees, any prepayment penalty on the existing loan, and gap insurance that may not carry over. Also the credit check itself, which briefly lowers your score.
Extending deliberately, when cash flow is the problem
Sometimes a longer term is the point. If the $483 payment is the thing straining the budget, refinancing the remaining $25,000 over 72 months brings it to about $415 — real relief of $68 a month.
Be clear that this is borrowing, not saving. The extra year adds roughly $900 of interest, and it lengthens the period during which the car is worth less than the loan. It solves a cash flow problem at a price, and knowing the price is the difference between a decision and a trap.
Timing within the loan
Amortisation front-loads interest, so the saving from a lower rate shrinks as the loan ages. Refinancing in year one of a five-year loan captures nearly all of the $690-per-point figure; refinancing in year four captures a fraction of it, because most of the interest has already been paid.
A rough test: if fewer than eighteen months remain, the paperwork rarely pays for itself at any realistic rate improvement.
Related calculators
- Auto loan calculator — the original loan on the same basis
- Loan comparison calculator — two offers side by side
- Depreciation calculator — whether the car still covers the balance