Refinancing a car loan is essentially replacing the current car's loan with another. Reasons for wanting to do this vary, but some reasons include wanting a better interest rate or needing a longer term to lower payments. Learn more about why you might consider a vehicle refinance and how to go about pursuing one.
Interest Rates
Some borrowers may have purchased a vehicle during a time when their credit was not in good standing, resulting in a higher than average interest rate. Perhaps rates have dropped or a potential lender provides special offers for car loans that would benefit the borrower. To fully gauge the effect an interest rate has on an overall loan payback amount, use an auto loan calculator: enter in a loan amount and change the interest rate to gauge differences. The Edmunds website offers one free to use.
Term Adjustment
A borrower might also want to refinance to lengthen the term of his loan, which often results in a lower payment. If a borrower has several thousand dollars to put toward her loan amount, doing so toward the original loan will not lower the payment; it will only allow her to pay off the loan early. Borrowers can refinance their current loan and put money toward it to enjoy a lower payment. Every $1,000 put toward a loan equals about $20 per month in payment, which can benefit some borrowers who need to modify their loan amounts.
Process
To refinance a loan, you must obtain the total payoff amount due to your original lender. You can apply to a bank of your choice either online or in person. Once you obtain an approval, you must provide proof of insurance to your bank. Your new bank, as the vehicle's new lien holder, will contact your old bank to satisfy the loan amount and get the title (if in a title holding state). Otherwise, the lien release is sent to the bank, who notifies the state's Department of Motor Vehicles of the vehicle's new lien and cancellation of the old one. You will receive a new title reflecting the lien change.
Considerations
Some borrowers will not be able to refinance their car loan. If the borrower originally carried money over to a current loan or paid more for the car than they should have, loan-to-value ratios will be inconsistent with bank lending requirements. For example, you cannot borrow $15,000 for a vehicle only worth $8,000, even with excellent credit. Work with your bank if this is an issue; you may have to put money toward the refinance to obtain an approval.
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