If I Refinance My Auto Loan What Will Happen to All the Money I Put Toward the Principal?

The process of refinancing is relatively common for people seeking to change the terms of their home loans. However, many people who have taken out auto loans may also choose to swap out their current loans for others. The process of refinancing an auto loan closely mirrors that of refinancing a home loan. When an auto loan is refinanced, the person will only refinance the portion of the loan that is unpaid, not the principal.

Auto Loans

When a person takes out an auto loan, the lender that he borrows the money from provides him with enough cash up front to purchase the car. In return, the individual agrees to pay the lender back over time by making regular payments to him. This loan is structured like most other loans, in that, if the borrower chooses, he can seek out another lender to buy up the remaining portion of the loan and issue him a new one.

Paying Off Loans

When a person pays off an auto loan, he is providing money to the finance company that is used to reduce the overall size of his debt. This money is applied to the principal of the loan -- the lump sum of cash that the person originally borrowed to buy the car and on which he now pays interest. After the principal of a loan is paid down, a person does not need to repay it when he refinances.

Refinancing

When a person refinances, the lender he is refinancing with agrees to pay off all the remaining principal on his current debt. The new lender then issues the debtor a loan roughly equivalent in size to the debt that he just paid off. The money that the debtor put toward the principal remains with the original lender. The new lender will not require that the debtor repay this amount a second time.

Minimum Amounts

According to the car reference website Car Buying Tips, some people may not be able to refinance their auto loan if they have already paid off too much of it or if the loan was too small to begin with. Generally, auto loan finance companies will be unwilling to extend a refinanced loan for an amount less than $7,500. This is because a loan for an amount less than this is not profitable enough to be worth their time.