Auto refinancing can result in paying a better rate on a car loan. Lower rates can reduce your present auto loan payment and free up cash to use on other expenses. But before meeting with an auto lender to refinance your loan, understand how the process works and consider the pros to refinancing.
Definition
Auto refinancing is the process of completing an application for an entirely new auto loan, wherein the new loan pays off the original auto loan. You can refinance with your existing auto loan lender, or choose to refinance with a different bank or loan company to acquire a better rate and loan terms.
Reason to Refinance
Modifying the terms of the original auto loan and getting a better interest rate on the loan is a key reason to refinance an auto loan. Some consumers have bad credit when applying for a loan, which results in a higher finance rate and payment. But if their score improves a year later, they can refinance and hopefully qualify for a lower rate. Paying a reduced rate saves money each month, and consumers pay less interest over the life of the loan.
Considerations
While getting a lower interest rate on an auto loan is a logical reason to refinance, certain situations do not justify refinancing. Let's say you're about to pay off the auto loan within two or three years. Refinancing often results in extending the auto loan, perhaps for another five years. Even though an extension can significantly lower monthly payments, you'll pay more money in interest over the life of the loan.
Present Balance
Refinancing an auto loan has certain limitations. For example, auto lenders check the balance on your present car loan, and if you owe less than $7,500 on the vehicle, the lender may not refinance the car loan.
Credit History
Boosting your credit score before speaking with an auto lender can improve your odds of refinancing. Lenders check your personal finances and credit history to see if you meet the qualifications for an auto loan. A good payment history and few debts help you qualify. And the higher your credit score, the lower the interest rate on the auto loan. Applicants with a poor credit history often qualify for higher interest rates and pay higher car payments.
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