Guide to Refinancing a Car: How it Works

Refinancing a car loan can be a great way to reduce your monthly payments and save money over the life of the loan. But it's essential to understand how refinancing works before you jump in. This guide will explain how refinancing works and walk you through getting a new car loan, and we'll also help you decide if refinancing is right for you.

What refinancing is and how it works

Refinancing is taking out a new loan to pay off an existing one. When you refinance, you may be able to secure a lower interest rate, which could lead to lower monthly payments or savings over the life of the loan. You may also be able to extend or shorten the loan term, which could also affect your monthly expenses.

To refinance your car loan, you'll need to apply for a new loan and use the proceeds to pay off the existing loan. Once the new loan is in place, you'll make payments on the new loan instead of the old one. Refinancing typically comes with fees, so weighing the costs and benefits before you decide to refinance is essential.

Benefits of Refinancing

There are a few key benefits of refinancing your car loan. You will want to do your research before you commit to a refinancing contract. However, in most cases, the benefits outweigh the downfalls.

Lower monthly payments

Refinancing may be a good option if you're looking to reduce your monthly car payments. By securing a lower interest rate, you can save money over the life of the loan. You can further reduce your monthly commitments by working to reduce your insurance premiums.

Refinancing can also help you extend or shorten the loan term, which could impact your monthly expenses. Refinancing is likely a good choice if you can secure a lower interest rate and save money on monthly payments. With all the extra cash, you can be the awesome aunt or uncle you always wanted to be.

Save money over the life of the loan

If you're looking to save money over the life of your car loan, refinancing may be a good option. By securing a lower interest rate, you can save money on interest payments over the life of the loan. Refinancing can also help you extend or shorten the loan term, which could impact your monthly expenses.

Build credit history 

Refinancing may be a good option for building your credit history. You can establish a positive credit history by making on-time payments on your refinanced loan. Paying off a loan (even with a new loan) leaves a positive mark on your credit score. This can improve your credit score over time and make it easier to qualify for future loans.

Disadvantages of Refinancing

Fees

Refinancing a car loan can come with various fees, so it's essential to weigh the costs and benefits before you decide to refinance. Some of the most common fees associated with refinancing are application, processing, and closing fees. These fees can add up, so be sure to factor them into your decision.

Impact on credit score

If you're considering refinancing your car loan, it's essential to be aware of its potential impact on your credit score. Refinancing a car loan can temporarily ding your credit score.

However, if you refinance wisely and maintain good credit habits, the impact on your credit score should be minimal. And over time, if you continue to make timely payments on your refinanced loan, your credit score should rebound.

Length of the loan

Refinancing may be a good option if you're looking to extend the length of your car loan. By securing a longer loan term, you can lower your monthly payments and save money over the life of the loan. Keep in mind that extending the length of the loan will also mean you're paying off your car for longer.

How to qualify for refinancing

Not everyone will qualify for refinancing. You'll need good credit and a steady income to qualify. You'll also need to have equity in your car, which is the difference between what you owe on loan and the car's value. 

If you're unsure whether you qualify for refinancing, talk to your lender. They can help you understand your options and what you need to do to prepare.

How to refinance your car loan

The process is relatively simple if you decide to move forward with refinancing. You'll start by shopping around for a new loan and comparing rates from different lenders. Once you've found a lender with a rate you're happy with, you'll apply for the loan and use the proceeds to pay off your existing loan.

The steps involved in the process

If you're ready to refinance your car loan, follow these steps:

1. Shop around for a new loan

2. Compare rates and terms from different lenders

3. Apply for the loan and use the proceeds to pay off your existing loan

4. Make on-time payments to build a positive credit history

When to Refinance

When you purchase your car, it may not be top of mind, but it's good to discuss refinancing your auto loan with your lender or your preferred banking professional about midway through your loan. The costs of your interest can sometimes nearly double the overall cost of the loan.

Improved Credit = Better Interest Rate

If you have good credit, you may be able to qualify for a lower interest rate, which could lead to lower monthly payments or savings over the life of the loan. Refinancing your car loan can be a great way to save money and improve your credit score, but weighing the costs and benefits before you decide to move forward is crucial.

Your Financial Circumstances Have Changed

If your financial situation has changed since you took out the loan, you may be able to secure a lower interest rate and reduce the overall cost of your loan.

Building a Credit History

If you're looking to build a positive credit history, refinancing can help. When you refinance your loan, it will show as a paid-off loan and a new approval on your credit, which will have a positive impact.

An Improved Credit Score

If your credit score has improved since you took out the loan, you may be able to qualify for a lower interest rate. Refinancing can also help you extend or shorten the loan term, impacting your monthly payments.

Current Payments are Difficult to Make

If you're struggling to make your monthly car loan payments, refinancing could be the solution you're looking for. Or you may want to consider trading in your car for something more affordable.

The Bottom Line

Refinancing can be an excellent way to save money on your car loan, but it's not suitable for everyone. Be sure to compare the costs and benefits of refinancing before you make a decision.

If you're unsure whether refinancing is right for you, talk to your lender or a financial advisor. They can help you understand your options and make the best decision for your financial situation.