When you cannot afford your car payment, one option that you may explore is the possibility of refinancing your car loan. Refinancing your car loan may work to your advantage or it may not help much, depending on your individual situation. Before making the decision, you have to look at several factors.
How the Process Works
Refinancing an auto loan is a step that many people never consider, but it can help them save money. With this process, you take out a loan from a new auto lender. Then you use the money that you receive from the new loan to pay off your existing loan. Once you have done this, you begin making payments on the new loan. Your loan will essentially start over with a new term and a new interest rate.
Extending Your Term
When you consider refinancing your auto loan, it may be to your advantage if you are in the middle of a loan term. For example, if you are in the third year of a five-year loan, it might work to your advantage to refinance. Since you have already paid down some of the balance of the loan, you can then refinance that remaining balance over another five-year period. This extends the repayment of the smaller amount and gives you a lower payment every month.
Lowering Your Rate
When you refinance your auto loan, one of the major benefits you can receive is lowering your interest rate. If you are considering refinancing your auto loan so that you can save money on interest-only payments, you have to make sure that the interest rate is lower than what it was on your original loan. For example, if you had an auto loan at 8 percent and the market rate is now 6 percent, you can refinance to save potentially thousands of dollars on interest.
Costs
When considering refinancing your auto loan, you may be worried about the potential costs of this process. Although refinancing a mortgage does come with closing costs, you should not have to worry about this with an auto refinance. Most of the time, you may only have to pay a small fee to transfer the title of your car from one lender to the next. Beyond that, you should not have to come up with anything out of your own pocket.
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