Many drivers do not realize that they can refinance their car loans in much the same way they would refinance their mortgages. The amounts may be lower and the terms may be shorter, but the two refinancing processes work in much the same way. So how does refinancing a car work?
Unless you paid cash for your car, you likely had to finance the purchase with a car loan. The interest rate you pay on that loan was determined by a number of different factors, from the length of the loan, the amount you financed, to your personal credit history. Having an interest rate that is higher than it could be will cost you extra money month after month,
Refinancing a car loan involves replacing your current loan with a new one. That new car loan will come with a different set of terms, and hopefully a lower interest rate. Those more favorable terms could mean significant savings month after month, and more money in your pocket.
Practically speaking, when you refinance a car loan, you will pay off your current outstanding balance with the proceeds from the new car loan. In most cases, your new loan will be with a different lender, so you will be paying off the old lender and taking out a new loan with the lender who is giving you the better terms.
In most cases, car owners choose to refinance their auto loans to save money. If they are able to get a better interest rate on the new loan, that lower interest rate should provide a lower monthly payment, saving money in the process.
While saving money on the monthly payment is generally the number one goal, drivers can also choose to shorten the length of the loan. A car buyer who took out a five-year auto loan, for example, may use a refinance deal with a lower interest rate to shorten the term to four or even three years. That means the vehicle will be paid for years earlier, with far less interest paid in the long run.
For buyers who want to shorten the length of their loans, it is important to take the monthly payment into account. If the difference between the old interest rate and the new one is significant, the rise in monthly payment may be little or nothing at all. If the two interest rates are similar, the monthly payment could go up substantially. For drivers with a solid income, this can be a smart trade-off, but for cash-strapped buyers, the shorter term may not justify the higher payments.
If you wish you had driven a harder bargain when you bought your car, refinancing the auto loan can give you one more chance to get it right. Refinancing your current auto loan can save you money and give you more room in your budget, freeing the cash for other, more important, things like getting out of debt or establishing an emergency fund!
If you are experiencing financial difficulty and are looking for a solution, non-profit credit counseling can help you make sense of all your options. Contact us today for a free financial assessment with one of our certified credit counselors.
Consumer Education Services, Inc. empowers people to overcome their financial challenges and lead financially-healthy lives.
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