Does refinancing a car start your loan over?

Refinancing swaps your current loan with a new one. You could get a lower interest rate and shorter or longer term than you currently have. But opting for a longer repayment period on a new loan could make you feel like you’re starting from scratch.

Most consumers refinance to save money. However, refinancing may not be a complete solution if you have a larger financial problem.

How refinancing restarts your car loan

If you decide that refinancing your loan is the best financial option for you, the new terms offered could make your monthly auto loan payments more affordable. But if you choose to extend the term, it may feel like you’ve restarted the loan, even if you’ve been making payments for some time.

You can avoid adding too many additional payments by choosing a term that is the same or shorter than the remaining term on your current loan. So, if you have 36 months remaining on your loan, you would refinance to a 36-month loan.

This will prevent you from paying additional interest. And, with a lower interest rate, your payments should also be lower.

However, refinancing may not be beneficial if you have less than 24 months remaining on your auto loan. You’ll generally pay the most interest in the first few years of the loan, minimizing the potential cost savings you’d get if you refinance towards the end of the repayment period.

How refinancing affects your loan term

The most common terms drivers are met with when financing a vehicle range from 24 to 84 months. The longer your term, the lower your monthly payment will be. But with a longer loan, you could be stuck paying hundreds of dollars more in interest than you would with a shorter loan.

Although you can get a different interest rate, the term change is the main factor in whether or not you effectively “reset” your loan. The term can be shortened or made longer — and the right choice depends on your budget.

To best determine your ideal term length, use an auto loan refinance calculator to find the one that will best balance the money saved and monthly payments you can afford.

When it’s a good idea to refinance your car loan

There are a few primary scenarios where it is a good idea to refinance your car loan.

• You’re struggling to afford monthly payments. Refinancing and reworking your current loan’s terms can give you more time to pay off your vehicle or a lower rate. However, you may be able to request a loan modification from your current lender without refinancing.
• Your credit has improved since taking out the current loan. Better credit will mean more favorable terms. This is especially true if you originally financed through a car dealership.
• You financed your current loan with the dealership. If you used dealer financing, you could be eligible for better loan terms with an outside lender. Check current auto loan rates to see how much you could potentially save with lower refinance rates.

If you decide to refinance, read the purchase agreement or reach out to your current lender to confirm they don’t charge prepayment penalties for paying off the loan early. Otherwise, you could incur a sizable fee, about 2 percent of your outstanding balance. It’s best to calculate and compare that number to potential refinancing savings. If the fee is larger than your possible savings, refinancing may not make financial sense.

How to refinance your car loan

If you determine refinancing is right for you, there are a few steps to take.

1. Review your current loan: Find the interest rate, payoff amount, months remaining and information about any fees or penalties.
2. Check your credit: Make sure your credit score is in good enough shape to get a decent rate. Check your credit report for errors at the same time.
3. Compare lenders: Don’t go with the first lender that offers a decent rate. Review several, including their eligibility criteria, penalties and what rates and terms you prequalify for.
4. Apply for refinancing: Once you decide on a refinancing lender, apply online or in person. From here, the lender will let you know if you qualify and how the rest of the process will work.

The bottom line

You’ll start from scratch with a new auto loan when you refinance and potentially get a lower monthly payment or interest rate. But before applying, consider the risks that come with refinancing. Look for other ways to save money if refinancing isn’t the best move for your financial situation.