Pete the Planner: Should you refinance your car loan? Probably not.

Pete,

I’ve got a car loan I took out earlier this year with an 8.5% interest rate. Since rates have fallen, should I refinance?

—Stephen, Avon

Hey Stephen, thanks for asking! You know, it’s always smart to be aware of interest rates—especially when they start to dip. But before we go diving headfirst into the refinancing pool, let’s talk through a few things. Because here’s the deal: Refinancing isn’t always the financial slam dunk it seems to be.

I get it. Lower rates feel like a money-saving party, and who doesn’t want to RSVP to that? But with car loans, it’s not always as simple as dropping your rate and riding off into the sunset. Car loans aren’t like those big, long mortgages where you save tens of thousands by shaving off a percentage point or two. Car loans are much shorter, which means the impact of a lower rate isn’t as earth-shattering. Think more “cup of coffee” savings and less “paid vacation to Hawaii.”

Here are the primary factors you want to consider:

◗ How much will you actually save? The whole point of refinancing is to save money, right? So, the first thing you’ve got to figure out is how much interest you’ll actually avoid paying by switching to a lower rate. But here’s the kicker: Most car loans are front-loaded with interest. This means you pay more interest in the first half of the loan, and less as time goes on. So if you’re a year or two in, you might not save as much as you think because you’ve already paid off most of the interest. Bummer, I know.

◗ What does it cost to refinance? Yep, it’s not free. Some lenders will hit you with fees to process the new loan. This could be anything from paperwork fees to title transfer fees. If these fees eat up all the savings from the lower interest rate, it’s like riding a Peloton—you’re not really getting anywhere.

◗ Watch out for a longer loan term. Refinancing might lower your monthly payment (yay!), but if you stretch out the loan for more years, you could end up paying more overall (boo!). Think of it like this: Refinancing is like ordering a pizza. Sure, you can pay less by spreading out the payments, but now you’re stuck eating cold pizza for the next 60 months. Gross. Keep the same loan term when refinancing, so you’re truly saving on interest without dragging out your payments.

◗ What’s left on your loan? If you’ve already paid down a big chunk of your loan, the savings might not be worth it. Sometimes, by the time you get to the part of your loan where you want to refinance, it’s like trying to get a discount on a half-eaten sandwich. It just doesn’t pay off.

Financial decisions aren’t all about the cold, hard numbers. How you feel about your payments matters, too. If a lower rate makes you sleep better at night, then sure, go for it. But remember, with car loans, you’re not talking life-changing savings. So, while refinancing might make you feel good in the moment, don’t let it distract you from your bigger financial goals.

Here’s a thought: Instead of refinancing, what if you threw any extra money you have toward paying off the loan faster? That way, you get rid of the loan and save on interest. Or, if you’ve got high-interest credit card debt hanging around, focus on getting rid of that first. Because as annoying as your car loan might feel, your credit card interest is probably the bigger villain in this story.

Stephen, run the numbers and see if you’re really saving enough to justify the hassle. And if it turns out you’re going to save only a few bucks, maybe keep things simple and just stick with your current loan. Sometimes, the best move is no move at all, and frankly, that’s the likely conclusion in your situation.

In the end, your financial journey is about making thoughtful, strategic decisions that help you reach your goals—not just reacting to what’s happening in the market. So take a breath, look at your bigger picture, and make sure any decision you make helps move you closer to where you want to be.

Good luck, Stephen. And, hey, let me know if you end up saving enough to treat yourself to something fun—like maybe a pizza that you can enjoy right now, not 60 months later.•

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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.