Refinancing your vehicle can provide the same benefits that refinancing a house provides. If done at the right time with the right lender and interest, it will not only reduce your monthly car payments, but will also reduce the total amount of the final loan amount. You can also end up with higher payments and higher interest depending on when and why it is done. Understanding the meaning and purpose of refinancing a vehicle will help you avoid potential pitfalls and use the process to your advantage.
Who Should Do It
Just because you are able to refinance your vehicle, doesn't mean you should. If your current auto loan for a new car is at 3 percent interest or less, it's unlikely you will find a better rate. However, if your current car loan is for more than 3 percent or you have a used vehicle with higher interest rates, then vehicle refinancing may provide financial benefit to you.
How it Works
Refinancing a vehicle is the same yet also different than refinancing a house. When you refinance a house you must have a new appraisal because the loan is attached to the amount of equity in the house. A vehicle refinance is not attached to the vehicle but attached to the amount you owe on the loan, therefore, no new appraisal is needed.
Applying for a vehicle refinance typically requires an application, a new credit check and employment verification. Once approved, you use the new loan to pay off the old loan and you begin paying the new loan off. You don't have to use the same lender that provided the original loan. You can go anywhere that will give you the reduced interest rate.
Benefit
Refinancing your vehicle loan at a smaller interest rate reduces the amount of your monthly payment. In addition, because of the reduced interest rate, your total loan payout will often be less. You can also take the money you are saving each month and apply it to the new loan and get the loan paid of early.
Possible Pitfall
According to Bankrate.com, refinancing a new car is not always a good decision because your vehicle is no longer new, therefore, you may be asked to pay higher interest on your "used" vehicle. If your current loan is only a few months old, however, you may be able to convince the new lender to give you the new car rate.
If you are far enough into the current loan, refinancing might extend the time to pay it off, meaning you will not own your car until later.
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