Although the refinancing of home loans is relatively common, many borrowers also choose to refinance their car loans as well. The process of refinancing a car loan is very similar to the process used to refinance mortgages. A borrower will approach one or more lenders and ask whether they would be willing to replace his current loan with another one. While a loan can be refinanced immediately after it is taken out, refinancing an automobile loan only makes sense in certain situations.
Refinancing Contracts
When a person refinances his current loan, the lender from whom he receives his new loan agrees to buy up the current car loan he has and issue him a different loan under different terms. Some car loans have prepayment penalties -- fees incurred if the loan is paid off too soon. Sometimes, the penalties expire after several years. Although a person can refinance a car loan whenever he wants, it makes more financial sense to refinance after these terms have expired.
Payment Size
According to the automotive reference website Car Buying Tips, a finance company will generally only refinance a car loan if the loan is for more than $7,500. If the loan is smaller than that, the profit on the loan will simply be too small for the finance company to find it worthwhile. Therefore, a person may not be able to refinance the loan on a car that has lost significant value or a loan he has paid too much on.
Interest Rates
A person may wish to wait to refinance a loan until he is confident that he can receive a lower rate of interest on his new loan. This will usually happen under two circumstances: the person will see his own personal credit rating improve, qualifying him for a lower interest rate from lenders; or interest rates will fall across the board due to changes in the lending market or the wider economy.
Changes In Personal Finances
Sometimes, a person may not be able to get a better interest rate on a loan, but he may be placed in such a financial situation that changing the size of his monthly payments is to his advantage. For example, if the person has seen a rise in his income, he may wish to change to a loan that he can pay off faster, thereby saving money on interest. Conversely, if his income has shrunk, he may wish to decrease his monthly payment size.
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