Car

How does car loan refinancing work?

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Cash-strapped car owners who find themselves upside down on their current vehicle – meaning they owe more than it’s worth – can look to refinance or consolidate their loans with a new loan for a different car.

With the new loan, the borrower chooses a shorter term and lower monthly payments that let them pay off the debt faster and save on interest. Some lenders will also knock a few percentage points off the interest rate once it’s time for refinancing, which means higher car payments now, but lower chances of hitting a rough patch and falling behind on payments in the future.

It’s best to find out what your current loan balance is before you shop around for refinancing because that will determine the amount you can refinance.

The ins and outs of refinancing

Unsurprisingly, most lenders won’t let you refinance a loan without paying off the old one first.

You’ll need to pay off your current monthly balance and then bring in a check for the difference between what you owe and what your new loan’s payment will be. Add the finance charges for both loans, and that amount will need to cover everything you owe in order to refinance.

Car loan refinance is an alternative way to help consumers with their cashflow problems without having to sell their cars or take lump-sum payments against the equity in the car

Lenders often offer a choice of refinancing an existing auto loan with their bank or credit union as well as consolidating multiple high-interest loans with lower-interest financing from another lender.

Borrowers can consolidate their current car loan by refinancing into a new auto loan at a better rate. They still owe the same amount, but they pay less per month. In order to refinance a car loan, the borrower needs to have equity in the vehicle

The drawbacks of refinancing

While refinancing can be a great idea for many drivers, it’s important to remember that there can be some drawbacks too. Some loans charge a fee when you refinance. One of the biggest drawbacks for borrowers considering refinancing is that their car will be repossessed if they can’t make payments on the new loan as they did with the old one.

Additionally, some lenders charge fees for refinancing car loans – so it’s important to make sure that it’s actually worth refinancing, and that you factor in any fees to ensure you don’t end up paying more than you would have with your existing lender!

Refinancing a loan generally results in extending the length of time you owe money on the vehicle, which may mean higher interest costs over the life of the loan

Summing up

So there you have it, our insight into how car refinancing works. If you’ve found yourself struggling to make your car payments, or if the rate on your current loan has changed, then it may be time for you to consider refinancing.

Just remember that while this is a great way to relieve some financial stress and bulky monthly bills, it’s also important that you read all of the terms and conditions before deciding to take on any loan.

 

Jim Lewis
the authorJim Lewis
Jim Lewis is worked as a Cadillac sales for several dealerships over many years. He is currently managing car dealerships, luxury cars and auto dealers Huntsville AL. He enjoys writing about brand’s vehicles and upcoming projects.