Does Refinancing Your Car Loan Restart Your Loan?


When you refinance your car loan, your current loan is replaced by a new one. A lower interest rate and a shorter or longer term than the one you currently have are both refinancing possibilties. However, choosing a new loan with a longer repayment time could make you feel like you're starting from the scratch. Most people refinance their homes to save money. However, if you have a more serious financial or credit issue, refinancing might not be a good solution.

How Refinancing a Car Loan Restarts Your Loan

Your monthly auto loan payments may become more manageable if you refinance your loan with new and better conditions. Even if you have been paying payments for some time, you should be careful about the loan term you select to prevent the sense of "restarting the loan."

Ideally, you should select a loan term length that is equal to or less than the remaining term on your present loan to prevent having to make too many extra payments to pay off the balance. Therefore, you would refinance to a 36-month loan if your current loan has 36 months left to run. You won't have to pay any further interest because of this. Additionally, your payments should be reduced with a lower interest rate.

However, if your car loan has less than 24 months left in the term, refinancing might not be advantageous. The initial years of a loan usually have the highest interest rates, which reduces any potential cost savings from refinancing later on in the payback duration.

How Refinancing Affects Your Loan Term

When financing a car, people usually opt for a term length between 24 and 84 months. Your monthly cost will be reduced the longer your term. However, a lengthier loan will likely cause you to spend more in interest than a shorter loan would.

You can also obtain a different interest rate when refinancing, whether or not you can actually "reset" your loan will mostly depend on the term modification. Depending on your budget, you can either shorten or lengthen the duration. Use a car loan calculator to identify the term length that will best balance your ability to save money with your ability to make monthly payments.

When is it a Good Time to Refinance Your Car Loan?

There are a few scenarios in which you should consider refinancing your car loan.

You’re struggling with your monthly payments. If you’re struggling to afford your monthly car payments, refinancing your loan can give you more time to pay off your loan or lower your interest rate. You may be able to modify your loan with your current lender as well. 

Your credit has improved since taking your original loan. Consistently making your loan payments in full and on time will increase your credit score. A better credit score will allow you to obtain better loan terms. In this scenario, you should be able to obtain a refinanced loan with a much lower interest rate. 

You financed your original loan with a dealership. If you used dealer financing, you’ll likely be able to refinance your loan with an outside lender at a better rate. Check our current rates page to see how much you could save refinancing with an outside lender. 

4 Steps to Refinance Your Car Loan

If you’ve weighed all your options and determined that refinancing is the best plan for you, here’s 4 steps you should take:

1. Review your current loan. Take a look at your current interest rate, remaining loan term, remaining loan amount and any other penalty/fee policies. 

2. Check your credit score. You need to ensure your credit score is good enough for it to make sense to refinance the loan. Check for any possible errors. 

3. Compare lender rates. A big mistake a lot of people make is they go with the first lender that offers them a decent rate. You’re better off looking at multiple lenders rate, penalty policies, and eligibility criteria. 

4. Apply for refinancing. Once you’ve decided on a lender, apply for refinancing with them either in person or online. From there, the lender will let you know if you qualify and how the rest of the process will work.

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