An auto refinance refers to replacing your existing loan with a new one. This new loan is then able to pay off the old one, which means you can get yourself a whole new agreement. A new contract will allow you to have a new APR (interest rate) and a brand new loan term.
In a nutshell, a car refinance a way out if your current deal isn’t suitable anymore. There could be several reasons you would want to opt for a car loan refinance. For one, it’s a great cost-cutting measure, which means you can save more money but only if your interest rate is lower than the last deal.
However, refinancing can also cost you additional fees with a certain amount of damage to your credit score. Therefore, if you’re wondering how a car refinance works, you may want to keep reading further.
How Does It Work?
Fortunately, you can refinance an auto loan much faster than, let’s say, a mortgage. All you need to have are all the necessary documents and information such as:
- Details of the current loan (monthly payment, interest rate, loan term)
- Expectations from the new loan
- Proof of income
- Credit reports (and much more based on your lender’s demands)
Make sure to check with your new lender if there’s any clause in the contract for a prepayment penalty. Also, you must never limit yourself to a single lender because only by comparing different loan offers will you be able to settle for the one that suits your needs best. However, if the end goal is to save money, you must carefully consider the interest rate and the loan term.
When Does It Not Make Sense?
While a car loan refinance is a great option if you’re hopeful about landing a better deal, it’s not ideal for everyone. For example, if you’ve already paid most of the loan and are looking to refinance your auto loan, it won’t benefit you much since you’re already done paying most of the interest.
It’s also possible for a lender to place restrictions on refinancing. For instance, some institutions or banks don’t deem a vehicle eligible for an auto refinance if it’s more than a certain number of years old or has been driven for a certain number of miles.
The Bottom Line
In the end, a car loan refinance works by allowing you to land a lower interest rate, lower monthly payments, and generally favorable terms. Remember, an auto refinance is meant to make your circumstances better and not otherwise. Hence, make sure to shop around enough to know the rates and compare them to find the one that suits your needs best.