Auto Loan Refinancing 101

Auto Loan Refinancing 101

Auto loan refinancing is a tool. Like any tool, it can be used to help or hurt a situation depending on how it is wielded. There are many great reasons to refinance, and several bad ones. Knowing when, how and why to get an auto loan refinance can make the difference between making your debt easier to pay off or significantly harder.

What is Refinancing?

Refinancing is simply transferring the terms of your loan to a different plan, often with a completely different creditor. In essence, when a creditor agrees to refinance your loan they are completely paying off your existing agreement and opening up a new one. When this happens, you owe the refinanced amount to the new creditor instead of the original lender.

Why Would Someone Refinance?

Since refinancing allows a change in the loan terms, it can be one of the few opportunities a person has to adjust how their debt is being paid. These adjustments include:

By refinancing, a person can secure more favorable terms for paying off their loan. A refinancing agreement will never be able to reduce the principal amount owed on a loan, but it can help reduce the overall balance by lowering the interest or paying the loan off quicker before more interest can add up.

One of the biggest reasons people refinance is because they can obtain a lower interest rate. This reduction can be the result of national averages shifting, or because the person has an increase in their credit score of 50 points or more.

Another reason people might want to refinance is because they want to lower their monthly payments. While some refinancing plans may allow this because the interest rates are less, others may simply extend the duration of the loan past the original agreement. The vehicle owner end up taking longer to pay the loan as a result, or possibly paying more interest.

If extending your loan is the only possible way to keep your car, refinancing may be your best option. It is important to keep in mind that you could be digging a deeper hole of debt for yourself, so be careful.

What’s the Best Way to Refinance?

Since the whole point of refinancing is to secure better terms, shopping around for the best rate is extremely important. Hopefully your financial situation has improved since you first bought the car, and you will now be able to inquire about options that weren’t available to you at signing.

If not, you will need to find a lenient lender who can help you avoid the strict repercussions of defaulting on your previous loan.

In both instances you should be patient and perform extensive research on available refinancing options. You will not feel as pressured for time as you may be when buying a car, allowing you time to find the best lender for your needs.

The bottom line is to run the numbers of any offers you receive, make sure that they give you an advantage rather than making your car repayment more difficult and take your time so that you can come out ahead of the game.

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