How to Use the Car Refinance Calculator
Deciding whether to refinance your auto loan requires careful analysis of your current debt and the potential new terms offered by lenders. This car refinance calculator is designed to help you quickly identify if switching to a new loan will save you money on a monthly basis or over the entire life of the loan.
To get the most accurate result, you should have your current loan statement handy to find your exact remaining balance and the number of months left on your contract.
- Remaining Loan Balance
- The total amount of principal you still owe on your current vehicle. Do not include future interest.
- Current Interest Rate
- The Annual Percentage Rate (APR) on your existing auto loan.
- New Interest Rate
- The rate being offered by the new lender for the refinance. Even a 1% drop can lead to significant savings.
- New Term
- The number of months for the new loan. Be careful: extending your term might lower monthly payments but increase total interest paid.
How Car Refinancing Works
When you refinance a car, you are essentially taking out a new loan to pay off your old one. The goal is usually to secure a lower interest rate, which reduces the cost of borrowing. The calculator uses the standard amortization formula to determine the monthly payment for both the old and new scenarios:
Payment = [P * r * (1 + r)^n] / [(1 + r)^n – 1]
- P: Principal loan balance
- r: Monthly interest rate (Annual Rate / 12 months)
- n: Total number of months (term)
By comparing the total of all remaining payments on your current loan to the total of all payments on the new loan, the car refinance calculator reveals your "Net Savings."
Calculation Example
Scenario: Imagine you have a $20,000 balance left on a loan with a 7.5% interest rate and 48 months remaining. Your credit score has improved, and a credit union offers you 4.5% for the same 48-month term.
Step-by-step solution:
- Current Payment: Calculate payment for $20,000 at 7.5% over 48 months = $483.58.
- New Payment: Calculate payment for $20,000 at 4.5% over 48 months = $456.07.
- Monthly Savings: $483.58 – $456.07 = $27.51.
- Total Savings: $27.51 x 48 months = $1,320.48.
- Result: By refinancing, you save over $1,300 in interest costs.
Common Questions
When is the best time to use a car refinance calculator?
You should consider refinancing if interest rates have dropped since you bought your car, if your credit score has improved significantly (e.g., jumping from "Fair" to "Good"), or if you are struggling with high monthly payments and need to extend the term to find financial breathing room.
Does refinancing hurt my credit score?
Initially, you may see a small, temporary dip in your credit score due to the "hard inquiry" performed by the new lender. However, in the long run, lowering your monthly obligation can help you maintain a better debt-to-income ratio, which is positive for your credit health.
Are there fees associated with car refinancing?
Most auto refinances have very low fees compared to mortgage refinancing. You might encounter a small title transfer fee or a processing fee from the lender. Always check if your current loan has a "prepayment penalty," though these are rare in modern auto lending.
Can I refinance if I owe more than the car is worth?
Being "upside down" or "underwater" on your loan makes refinancing more difficult. Most lenders have a maximum Loan-to-Value (LTV) ratio, often between 100% and 125%. If you owe significantly more than the car's book value, you may need to pay down the balance before a lender will approve a refinance.