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What happens when you refinance a car?

What is the process to refinance a car? Should I refinance? Does refinancing a car loan help? Read our guide to see what happens when you refinance a car.



To refinance a car loan is a straightforward process: you just apply for a new car loan that pays off the existing debt on your current car loan.

In this case, you establish a new interest rate, new loan conditions, and a new loan agreement. All of these results will have an impact on the amount of time you have to pay off the new debt. Ideally, a refinanced loan will come with better terms, specifically lower interest rates or a shorter payoff period.

The information provided in this article will assist you in understanding the most essential facts regarding refinancing a car loan. So, if you ever wondered how to refinance your car, then please read on.

Why Should You Refinance?

Lenders may determine your car loan rate based on a variety of variables. These include your credit score and debt-to-income ratio. Your credit score is a bit self-explanatory. However, you can determine your debt-to-income ratio simply by dividing your monthly salary by your monthly repayments. While keeping those variables in mind, you can make an educated decision on when to refinance.

For example, if your credit is better and you managed to lower your DTI ratio, you probably should look into refinancing. Refinancing, in this case, may lead to better terms.

Even if your financial position hasn’t substantially improved, it may be worthwhile to search for superior loan terms. For instance, you may have obtained a loan with an 8% interest rate while competing lenders are now offering lower rates.

This is particularly important if you obtained your initial loan from a dealer since they often mark-up interest rates in order to generate more profit when they sell vehicles.

If you are unable to get a lower interest rate, all is not pointless. It still may be worthwhile to seek a longer repayment term to decrease your monthly vehicle payments. At times having extra money per month is better than paying off a loan quickly.

Now if you are unable to locate a new loan for your car, you could be able to renegotiate the terms on your existing loan. You will have to talk to your current bank to see if they are agreeable to better terms that will assist your ability to continue paying the loan.

However, bear in mind that the longer you spend repaying your loan, the more time you will spend paying interest. In general, if you have a loan that has many months under its terms, you will pay higher interest overall.

In general, vehicle owners will refinance for three typical reasons.

  • Reduce monthly payments
  • Lower interest rates
  • Shorten the time it takes to complete payments

Depending on your present circumstances, auto refinancing may accomplish any or all of these outcomes.

Reduce Your Car Payments

Most individuals seek auto loan refinancing to reduce monthly payments. This is one of the main reasons why refinancing auto loans has gained in popularity. An individual’s financial situation can easily change over time. Your car loan could have been easily affordable when you first bought it, but changes in income happen, often without much notice.

There are two methods to reduce your vehicle loan monthly payments: decrease your interest rate or lengthen your loan period. Sometimes, you can achieve both.

Typically, the main way to significantly reduce your vehicle loan payments is to extend the term. However, if you extend your term of the loan, you may end up paying considerably more in interest, leading to a larger amount of negative equity.

However, if your lender permits you to prolong your loan term and offers you a cheaper interest rate, you may benefit by reducing your monthly payments, and keeping more money available for everyday needs, or saving up to help pay down your loan periodically.

Reduce your interest rate

While the aim of refinancing is often to reduce monthly payments, some people prioritize lowering their loan interest rates. If you improve your credit scores while paying off your vehicle loan, you may typically obtain a new loan with a reduced interest rate.

Lowering your interest rate may decrease the total amount of interest you pay on your vehicle loan, provided you do not extend your loan term.

Change the Term Duration

When you wish to refinance your car, you may pursue refinancing to alter the duration of existing loan terms. However, this objective isn’t typically about reducing monthly payments at any cost but instead altering the number of months you pay for your vehicle.
You may want to do this to pay off the loan faster. If you have the extra cash per month, that may be a reasonable solution.

Another little-known reason to think about refinancing is to change co-signers. For instance, sometimes you may want to refinance to remove a co-signer or add one to your vehicle loan. Refinancing is a simple method to do this since the refinancing procedure results in a new contract.

When Is It A Good Time To Refinance?

When a lender’s interest rates have fallen or your financial position has improved, it is a smart idea to consider refinancing your car loan.

As previously stated, a reduced interest rate may be beneficial in a variety of ways. With a cheaper monthly payment, you free up some of your money to use elsewhere. You could even pay off the loan faster or find yourself saving money over time while repaying the loan.

Many people do not spend much time researching interest rates when buying a car. Refinancing could give you better terms the second time around.

Whatever your circumstances, refinancing may significantly make paying back your loan easier and improve your financial position.

What Should You Avoid While Refinancing Your Car Loan?

As with any loan, your monthly payment is heavier in paying toward interest at the beginning, and gradually increases toward principle as it progresses.

If you are near the end of the term of your loan, refinancing doesn’t necessarily make sense. This is because you have already paid the majority of the interest. While it may reduce your monthly bill, refinancing will cause you to restart paying more in interest.


How Long Would It Take To Refinance A Car?

Refinancing your car loan can be done quickly and sometimes on the same day that you apply.

When Applying for Refinancing Is My Credit Checked?

When you seek to refinance your existing car loan your credit is checked. They refer to this as a “hard inquiry.” Therefore, your credit report will be reviewed by the lender before they make a decision.

Keep in mind that this type of credit check will result in a little drop in your credit score. The agencies that report credit will believe that more debt, in the form of a new loan, will increase the likelihood of you, the borrower, skipping a payment. This is why they reduce your total score.

However, after a while, the credit agency will eventually see that the previous loan has been paid off. Then when they see that the original debt has been reduced and you have a good number of monthly payments fulfilled, your credit rating should rise once again.

Will Multiple Credit Checks Affect Your Credit Score Negatively?

A frequent myth is that shopping around for rates and having your credit checked numerous times will harm your credit score more than simply completing a single application.

In truth, the credit agencies actually advise customers to shop around. To help you do that, multiple hard inquiries within a few weeks will be treated as a single check in terms of your credit score.

What Information Do I Need To Provide With My Auto Refinancing Application?

You will just need evidence of income, proof of car insurance, and your valid auto registration.

Where Can You Refinance Your Existing Car Loan?

Many local banks or credit unions offer refinancing for auto loans. To find competitive rates, and receive multiple offers online, we have a guide on where to find online providers for auto refinancing.

Concluding Thoughts

Refinancing your vehicle is a fairly straightforward process. It does not take much time, but can lead to great savings in your monthly budget.

Do your homework before you start applying for a new loan. Your financial profile will need to be in good shape to ensure you receive favorable terms. Interest rates could be lower, in general, but your personal credit worthiness will play a bigger factor in what rate you are eligible to receive.

Refinancing your car could be a good way to reduce your monthly bills. You can lower your payment either by getting a better rate, or extending your term. Maybe you want to pay it off faster by shortening the term, and get a better interest rate at the same time. No matter your financial goals, considering refinancing of your auto loan is a good option for your budget.