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Auto Refinancing Explained

Scott Bilker Scott Bilker is the founder of DebtSmart.com and author of the best-selling books, Talk Your Way Out of Credit Card DebtCredit Card and Debt Management, and How to be more Credit Card and Debt Smart. Receive the 5-Year Loan Spreadsheet when you subscribe to his email newsletter.

There are a number of scenarios in which refinancing your car might make good sense. But before we get into an explanation of all of that it’s probably a good idea to gain some understanding of what it actually means.

So, let’s do Auto Refinancing Explained 101 first.

What Is Auto Refinancing?

Said simply, the act of taking out a new loan on a car and using the proceeds to pay off the original loan constitutes auto refinancing. In essence, another lender will buy out the contract between you and the original creditor to be replaced by a new loan. Ideally, this new loan will offer advantages you didn’t have with the original loan.

These typically include:

  • Reduced monthly car payments – A refinanced auto loan might lower your monthly car payment as a result of a lower interest rate, a longer loan term or both.
  • A lower interest rate – If you qualify for a lower interest rate than that required of your existing loan, you may end up paying less in total interest when the loan amount has been paid off. This usually occurs when the duration of the loan is not extended to a longer term.
  • Longer loan term – If the loan term is lengthened, your monthly payments will generally be smaller. While this situation might find you paying more for the car in total when the interest charges are taken into account, it will reduce the stress on your monthly budget in the interim.
  • Shorter loan term – A shorter term may increase the monthly payment, but it will almost always reduce the total amount of interest you’ll pay.

There are also some disadvantages of which you should be aware:

  • Added loan expenses – Many refinance deals entail transaction fees, which can add to the cost of the deal. Further, you’ll usually be extending the loan term out farther than it was before, so even with a lower payment, you could wind up spending more because you’ll make interest payments longer.
  • The length of your remaining loan term – If you’re well into the term of the original loan, it might not make sense to start all over again, even if you can get a lower payment.
  • The value of your car – If you owe more on the car than it is worth, the likelihood of refinancing working in your favor is very low. You’ll have to pay the first loan off to get the original lender to release title, so the second lender can use it as collateral. However, no lender is going to loan you more than the car is worth, so the amount you get in the refinance probably won’t satisfy the original obligation.
  • Your car’s age and/or mileage — If your car has experienced significant depreciation, lenders are going to be reluctant to consider it adequate security for the loan. To compensate, you’ll have to come up with a large cash down payment to make the refinance work in your favor. Of course, if you can do that, you probably don’t need to be concerned about refinancing in the first place—right?

So now that you’ve seen auto refinancing explained, take advantage of an online refinance calculator to figure out if refinancing makes good sense for your particular situation. Keep in mind; it’s all about finding the deal that works best for you.

Even if you need to get a bad credit refinance car loan (yes, they do exist), you should take some time to make sure you’ll come out ahead. The last thing you want to do is make an unfavorable situation worse with an ill-informed decision.

Weighing the Pros & Cons Is Up to You

Hopefully this article has answered any question you have regarding auto refinancing. But know that the final decision is up to you. Take a careful look at your finances to make sure you are getting the best deal for your budget. For some, paying off their car loan as quickly as possible is the goal. Others might want a little breathing room in their budget and don’t mind taking a few extra months to pay off their loan.

Neither option is intrinsically right or wrong. But one might be better for your situation than another. In summation, be sure to weigh the pros and cons before making any final decisions.

This entry was posted in Automobiles. Bookmark the permalink. Read more articles by Scott Bilker. (Also see articles by all authors and articles in all categories.)

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