Owning a car can be expensive. Next to your rent or mortgage, your car payment can be one of your largest household expenses.
According to AAA, the average cost of owning and operating a car is $9,666 per year, and even more if you drive further or own a larger vehicle.
Luckily, there are some pretty simple ways to save money on car expenses without requiring a lot of sacrifices. One of the easiest ways is to evaluate your auto financing and see if you can save money by refinancing.
Should You Refinance Your Auto Loan?
On average, a new car costs over $42,000. Unless you have enough cash sitting in your bank account (and few of us do), you will need to finance at least part of that cost.
With interest rates at all-time lows, refinancing your auto loan could save you a significant amount of money, especially if your credit score has recently improved or you originally financed with a high-interest rate.
Even if you think you got a good deal on your borrowing costs, it can pay (literally) to check your refinance options. According to Gravity Lending, their customers save an average $134 per month after refinancing.
5 Benefits of Refinancing
If saving money isn’t enough, there can be additional benefits to refinancing your auto loan. Here are five of the biggest ones.
1. Get a Better Interest Rate
Possibly, one of the most common reasons people refinance their auto loan is to get a better interest rate. Over the life of an average car loan, you can end up saving thousands of dollars in interest payments by lowering your interest rate by just a point or two.
For example, if you financed a new car at $40,000 over a five year term at 6% interest, you would pay $6,399 in interest over the five year term. If you could refinance at a 3% interest rate, that would cut your total interest payments to $3,125, a savings of a whopping $3,274 over the life of the loan! Not bad for a few minutes of work.
If you originally financed your car a few years ago, you may be paying a higher interest rate than you need to. Interest rates continue to hover around all-time lows.
And if you financed through a dealer, you should double check your interest rate. Dealer financing is often a way for them to make extra profit and is not always competitive with other alternatives.
2. Lower Your Monthly Payment
If your household budget has changed and your other expenses have gone up (hey, life happens sometimes), it can make sense to secure a lower monthly car payment.
One way to do that is by lowering your interest rate, which you should try to do first because that is free money. But another way is by extending the length of the loan.
For example, if you took out a three-year loan and your car payment is $600 per month, by extending it to five years, you could lower your payment to $377, even without an interest rate reduction. While you would have to make payments for an extra 24 months, that $200+ savings every month could make the difference in balancing your budget and avoiding late payment penalties or racking up credit card debt.
3. Shorten Your Loan Term
On the opposite side of the coin, if you have some room in your budget and can afford to make extra payments, refinancing your auto loan to a shorter term can help you save money in the long run.
The longer the term on your loan, the more interest you’ll pay over the life of the loan. If you are able to make higher payments each month, you could end up saving a significant amount in interest. Plus, once your car is paid off, you will free up that cash to add to your emergency fund or invest in your retirement!
It may sound counter-intuitive, but having a higher car payment can ultimately save you money if you have the extra cash each month.
4. Add Additional Loan Policy Benefits
Depending on your current loan, you may be missing out on some benefits that can help protect you in the event of unforeseen circumstances.
For example, Guaranteed Asset Protection or GAP coverage can cover the difference between what you owe and what the car is worth in the event of a total loss.
While there is some additional cost associated with these benefits, they can be worth the trade-off depending on your circumstances. Some other products you can take advantage of in a refinance include:
- Depreciation protection – recover up to $10,000 of vehicle equity above and beyond your insurance settlement
- Vehicle debt protection – protects you in the event of an unforeseen income loss
- Vehicle service contract – extends the manufacturer’s warranty and includes protection from high dollar repairs
- Vehicle protection plan – protects your car from repair costs due to unexpected issues
5. Take Advantage of an Improved Credit Score
If your credit score has improved since you first applied for your auto loan, find out if you can refinance with a better interest rate or terms.
It’s always a good idea to keep tabs on your credit score. If needed, you can get a free copy of your credit report at AnnualCreditReport.com.
If you’ve been making your payments on time on your current auto loan and other credit accounts, there’s a good chance your score has improved. Even a small improvement in your credit score can help you qualify for a lower interest rate, and there’s nothing to lose by seeing what other refinancing options are available to you.
How to Refinance Your Vehicle with Gravity Lending
While obviously Gravity Lending is sponsoring this post, I don’t recommend any service I haven’t thoroughly researched and vetted myself. And I can say with confidence that Gravity Lending should be at the top of your list if you’re considering refinancing your auto loan.
It’s been awhile since I’ve financed my own vehicle, but I don’t remember it being nearly as easy as it is now. One of the benefits of Gravity Lending is that with a single online application, you can get multiple offers from lenders nationwide who are competing for your business.
In addition, they have an average 4.9 review score, are the highest rated auto refinance company, and earned an A+ Better Business Bureau Rating, so you can be confident in the service they are providing.
If you’re still on the fence, here are a few stats on Gravity Lending’s service:
- The average client saves $134 per month and $2,846 overall on their auto loan
- Interest rates as low as 1.99%
- Loan terms between 24-84 months
- Wait up to 90 days before making your first payment
- Easy online application process (you can complete it from your phone!)
Andrew Herrig is the founder of Wealthy Nickel, where he writes about personal finance, side hustles, and entrepreneurship. As an avid real estate investor and owner of multiple businesses, he has a passion for helping others build wealth and shares his own family’s journey on his blog. Andrew’s expert advice has been featured on CNBC, Entrepreneur, Fox News, MSN, and more.