Understanding Vehicle Loan Refinancing

Vehicle Loan Refinancing helps consumers change their car loan terms to potentially lower interest rates and payments with cosigners’ additions or releases.

Prior to refinancing a loan, borrowers should understand and think about the terms and conditions in detail, as the changes may have considerable impact on the lifestyle and budget.

What is Refinancing?

The process of refinancing a car loan involves replacing an existing auto loan with a new loan that includes new terms, such as interest rates, monthly payments or loan duration. Refinancing is also typically the time when borrowers choose to add or remove a cosigner to the loan if their financial situation has changed significantly since purchasing the car.

You can save interest costs that will come down both in the long and shorter term, however, if you refinance, then you should weigh the savings versus the refinancing fees or other costs that lenders impose. Lenders will also allow you to borrow against the equity that refinancing will build up to pay down other debt or to finance other needs; their loan-to-value estimation will then determine the amount of the loan based on this calculation and their determination about your creditworthiness.

Why Should I Refinance?

Refinancing to lower your monthly payment or save on interest over the life of your loan can be a home run, but make sure you’re clear on your goals before you apply – refinancing requires a credit check that can ding your score temporarily.

Whether the blow to your credit is worth it depends on where your financial status is now compared with when you took out your loan in the first place. Just stretching out the loan term or pulling cash could have put you upside down on your vehicle loan (meaning you are ‘upside down’). If you have dealership financing that has a better rate; or if you have a fixed-rate loan where the APR would be lower than the rates of any new credit established, that is one exception; but, again, you would want to make sure there is an interest savings that is greater than any prepayment penalties or early-repayment penalties charged – your loan calculator will be your friend here; or, you could wait for your score to increase, and only then qualify for better rates than the ones you are on, thus placing you more favorably when competing for a loan with your prior car loan lender.

How Can I Refinance?

It’s sometimes worth refinancing an auto loan if the new interest rate and the new monthly payment are a better fit. In running the numbers to refinance, however, be sure to include a calculation of any one-time fees for retitling or reregistering the vehicle. Those fees should be assessed against the total potential savings – if they do not offset the potential savings, then you will be coming out ahead.

Because your credit improves anytime between getting your first auto loan and now, it’s possible your odds of qualifying for a new, better loan are far better. If interest rates have dropped sharply, and your creditworthiness is solid, refinancing can be beneficial.

Do your homework first, however, so you’re not rolling around town with a bunch of important paperwork, like your old loan payoff information (balance and pay-rate info); vehicle data (year, model, mileage and VIN numbers); and proof of income (W-2s, paycheck stubs or bank statements).

What Are the Benefits of Refinancing?

For some, one of the benefits of refinancing can be helping you reach a lower interest rate, which in turn helps you reach lower monthly payments on your car loan, giving you less to pay off on a month-to-month basis and more cash for other financial obligations while simultaneously saving you money over the entire life of owning the car.

Refinancing can also help if you don’t want to become ‘upside down’ on an auto loan (owe more on it than it is worth) – an issue if you want to sell the car or replace it.

Refinancing your vehicle loan can allow you to renegotiate the period of your loan and save money by applying smaller payments towards the vehicle over its duration. Yet if your present loan carries prepayment penalties, these can neutralise any gains made through refinancing while extending its term could augment your overall debts.

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