How to Calculate Auto Refinance Savings: Is It Worth It? | Car Markup

Did you finance your car directly through the dealership? If so, there is a very high probability that you are paying a higher interest rate than necessary. Dealerships often mark up interest rates to increase their profits. This is where auto refinancing comes in, and calculating those potential savings could be the easiest money you ever make.

What Does It Mean to Refinance a Car?

Refinancing a car simply means taking out a new loan to pay off your existing auto loan. The new loan typically comes from a different lender—like a credit union or an online bank—and ideally offers better terms, such as a lower interest rate, a lower monthly payment, or both.

When Is Refinancing Worth It?

Refinancing is not always the right move. However, you should strongly consider crunching the numbers if any of the following apply to you:

• Your Credit Score Has Improved: If your credit score has gone up by 50 points or more since you first bought the car, you likely qualify for a significantly lower interest rate.
• Interest Rates Have Dropped: Even if your credit score hasn't changed, macroeconomic shifts might mean that average auto loan rates are lower today than when you signed your contract.
• You Didn't Shop Around: If you took the very first rate the dealership offered you without comparing it against local credit unions, you are almost certainly overpaying.
• You Need Immediate Monthly Relief: Even if you don't get a lower interest rate, refinancing allows you to stretch the remaining balance over a new 48- or 60-month term. This will dramatically lower your monthly payment, though it will cost you more in total interest in the long run.

The Hidden Costs of Refinancing

Before you sign a new contract, check your current loan for prepayment penalties. Some lenders charge a fee if you pay off the loan early. Additionally, the new lender might charge a small origination fee or title transfer fee. Ensure that your total interest savings far outweigh these fees.

How to Calculate Your Refinance Savings

Don't guess—use math. You need to compare the total remaining interest on your current loan versus the total interest you will pay on the new loan.

Taking 10 minutes to shop for a new rate and calculate the savings could literally keep thousands of dollars in your pocket over the next few years.