I’ll be honest, auto refinancing can be confusing, but I’ll make it as easy as 1-2-3. If your car loan interest rates are too high or you want to reduce your number of payments, it might be a good choice for you. How it works is simple: you pull out a new car loan with a lower interest rate than the one you already have. Your new loan will then pay off your old loan and transfer the vehicle title into their name.

It sounds like it’s too good to be true. Why not choose the lower interest rate to begin with? That loan was probably not available when you bought your car, especially with the constant change of interest rates. As a matter of fact, federal interest rates are at an all-time low, so a lot of people are taking advantage of this since the economy is struggling so much.

Let’s say you bought a brand new Mercedes. Considering car loan interest rates can vary from 4-14%, let’s say you’re paying 9% on your $40,000 luxury sedan. Your monthly payment would be $830 per month, and you’re paying it off over 60 months. As a result, you would be paying $9,800 in interest over 5 years. However, if you refinanced your vehicle, you could possibly lower your rate to 6%, making your monthly payments $773 a month, and paying $6380 in interest over 5 years. This means you would be paying $57 less per month and $3420 less overall.

Individual cases will obviously vary, but you could potentially save up to $75 per month by refinancing. It really depends on what you find. Plus, it’s important to note that there might be hidden fees for paying your first loan off early or switching loans. Most companies don’t charge you to refinance your vehicle and normally there is no down payment.

However, you should weigh the pros and cons before deciding if you should refinance. If you have poor credit, getting a lower interest rate would make paying off the loan easier and help rebuild your credit. Rebuilding your credit can help you reach other financial goals faster. Do you want to take a weekend trip to Vegas? Or maybe you want a new big screen TV? You’re already one step closer.