Refinancing a car loan is much like a loan transfer. You must apply for a new loan to pay off your old lender. Reasons for pursuing a refinance vary. Often, refinancing presents an opportunity to save money, either by lowering your loan's interest rate or changing your term to lower your monthly payment amount.
Why Refinance
Check current interest rates to determine if your rate is higher than average. If substantially lower, you can save thousands of dollars over the term of your loan and decrease your car payment. Even if interest rates haven't changed, you can benefit from providing a down payment toward your loan amount. If you put thousands toward your current car loan, your car payment won't decrease. Refinancing with a down payment allows you to shorten your lending term, interest payback amount and monthly payment.
Determine Costs
To determine if a refinance could prove financially beneficial, use an auto loan calculator to review different refinance scenarios. Edmunds.com offers a free auto loan calculator. Call your current lender to obtain your car's payoff amount and use the balance as your loan amount. Using a calculator, determine overall payback costs and monthly payment differences by changing the interest rate, providing a down payment or adjusting the term. You may find that pursuing a refinance is not beneficial, or that you can save money.
Considerations
In order to obtain a competitive interest rate, your credit must be in good standing. While you can still obtain a lower interest rate by refinancing, you might not obtain an approval for your requested loan amount. If you just initiated your current loan, you may find you're upside down, or owe more than the vehicle's value. With excellent credit, you can hope to obtain up to 120 percent of the car's bank-determined vehicle value. However, if you also financed your taxes and after market items, a down payment may be required to put your loan and vehicle value in line with one another.
Other Options
If you're having a hard time making payments on your current loan or are experiencing financial hardship, your lender may be able to work worth you to modify your current car loan. You'll have difficulty obtaining a new car loan if you're unemployed, if your income has decreased or if your current loan payments are past due. While applying for a new loan with a co-signer is an option, you can also ask your lender for help. You may be able to defer your payments, which allows you to miss several payments without penalty. You lender can also modify your loan to increase your payback term and decrease your car payment.
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