Car refinancing involves replacing your existing auto loan with a new one, ideally with better terms. The primary goals of refinancing are to secure a lower interest rate, reduce your monthly payments, shorten your loan term, or access cash by borrowing against your car's equity. This calculator focuses on analyzing the potential savings from securing a lower interest rate.
How the Calculation Works
The calculator uses standard loan amortization formulas to determine monthly payments and total interest paid.
1. Monthly Interest Rate: The annual interest rate (APR) is converted to a monthly rate by dividing by 12.
Monthly Rate = Annual Rate / 12 / 100
2. Loan Term in Months: The input for the loan term in months is used directly.
3. Monthly Payment Calculation: The formula for calculating the monthly payment (M) of a loan is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1] Where:
P = Principal loan amount (Current Loan Balance)
i = Monthly interest rate
n = Total number of payments (Loan Term in Months)
4. Total Amount Paid: This is calculated by multiplying the monthly payment by the total number of months.
Total Paid = Monthly Payment * Loan Term in Months
5. Total Interest Paid: This is the difference between the total amount paid and the principal loan amount.
Total Interest = Total Paid - Principal Loan Amount
The calculator computes these values for both your current loan (using current balance, current rate, and remaining term) and the proposed new loan (using current balance, new rate, and remaining term). The difference in total interest paid and monthly payments reveals your potential savings.
When Should You Consider Refinancing?
Improved Credit Score: If your credit has improved since you took out the original loan, you may qualify for a lower interest rate.
Lower Market Rates: If prevailing interest rates have dropped significantly, refinancing can help you take advantage of the new lower rates.
Shorter Loan Term: You might want to refinance to a shorter term to pay off your car faster, even if it means a slightly higher monthly payment.
High Current Rate: If your current interest rate is significantly higher than average for similar loans, refinancing is usually a good idea.
Always compare the costs associated with refinancing (like potential fees) against the projected savings to ensure it's a financially sound decision.