Car payments can be a sizeable chunk of your budget. Once you have financed your car, you may feel stuck and committed to the term and payment. This doesn’t have to be the case. In fact, many people can refinance their car loans.

Car loan refinancing can help you change almost every aspect of your car loan — term, rate, fees, etc. But it could come at a price and potential higher amount in the overall paid interest if you extend your loan term. So make sure you look into your reasons for refinancing, the value of your car and the overall cost. Here are a few points to get you started.

Reasons to refinance

You can refinance your car loan for many reasons. For example, you might have got a high rate initially and now your bank is offering a more competitive rate. Another reason could be that you want to pay your car off sooner, but you don’t want to pay interest or penalties for early repayment.

Other reasons to refinance your loan is to reduce your monthly payment. If you stretch your loan on a longer term, you’re more likely to get a lower monthly payment, especially if you lock in a lower interest rate.


When you’re comparing various car refinance offers, you need to look beyond the quoted rate and the potential monthly payment. Just like a new loan, know the costs of getting out of the loan, aka early repayment. And calculate the overall interest over the life of the loan. Refinancing into a longer term could mean your outstanding loan and payment would be higher than the value of your car. In short, you will be upside down on your loan.

Even if the bank allows this to happen, try to avoid it. You don’t want to be in a situation where you will have to put money in to settle your car loan if your car is totalled in an accident or you have to sell it. The bottom line: while refinancing is a good way to stretch your loan term, don’t go beyond what’s reasonable for your car value.

Other factors

If your goal of refinancing a car loan is to pay it off quicker, let you bank know. They might be able to work out a deal for you that is similar to refinancing without the costs that comes with taking on a new loan from a new lender.

In addition, think of how much you will save over the life of the loan. Although debt is not something to want to hold into, going through a loan refinance to save a small amount of money over several years may not make a lot of sense. In fact, in some situation, it could hurt you. For example, if you’re planning to buy a home, this refinance could signal issues with your overall financial situation. So think twice between getting tempted to refinance your car loan.

Plan for refinancing

With the pros and cons of car loan refinancing, be sure you have all the information before you accept an offer. Know your current rate, your current loan terms and overall costs if you keep your loans. Now, compare this to what you’re being offered. Take into consideration the depreciation of your car and potential changes in your situation — like needing a different car or having to sell the car and relocate. In addition, be aware of how your lender will value your car. A market price for an old car can vary significantly and this value is likely to guide the interest rate for your loan.

If the interest rate on your car is much higher than expected, consider other options. For example, would it make sense for you to take a personal loan and payoff your car, if your goal is to get out of the car loan sooner? Similarly, if the goal is to get more cash on hand, a personal loan may be the answer.

The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.

Car refinancing

You can extend you term and lower your monthly payment

Check for additional fees and charges

Consider the value of your car and your future plans

— R.O.