How To Refinance A Car Loan

When you take out a car loan, you may think you're attached to your finance plan until the balance is paid or you get rid of your car. But what happens if your payment plan isn’t meeting your needs?

Refinancing your car loan is smart for some, but not all. Learn what refinancing is and if it’s right for you.

What Is Auto Loan Refinancing?

Refinancing your car loan essentially means that you're taking out a new car loan, and the new car loan is replacing the existing loan. Through refinancing, all aspects of your current loan will be eliminated and replaced by new loan terms.

For example, you may owe $5,000 on your current car loan, and you may have 24 months remaining on the loan with a 5 percent interest rate. If you refinance your car loan, you may carry over that $5,000 outstanding balance and adjust the loan term and interest rate. Your new loan term may be 36 months and your interest rate may be 4 percent.

Extending the loan term in this way can reduce the monthly payment dramatically and make it more affordable, but it also means it will take you another 12 months to pay your auto loan off. During this term, it may be possible for you to become upside down on your loan. The lower interest rate could potentially save you money on interest charges, but these savings could be negated by the fact that you're paying interest for a longer period of time.

However, if you're facing the risk of getting your car repossessed because the payments are no longer affordable, refinancing may make sense regardless of these factors. This situation would require immediate action, including reaching out to a lender like Upgrade.

When To Refinance

First, understand what you want to achieve through refinancing. For example, if the cost of your auto insurance and car payment are unaffordable, refinancing to reduce your monthly payment may help you to improve your financial situation.

However, in order to understand the full costs of refinancing, use an online calculator. You can learn about the total interest charges and other related expenses.

How To Refinance A Car Loan

Shop around to determine the best overall terms that you qualify. Then, use an online calculator to more closely examine the pros and cons. If you decide to move forward with refinancing, you formally apply for the loan. Typically, the new lender will pay off your existing loan directly using the loan proceeds. This means you may only have to sign the loan paperwork to finalize the refinancing process.

As you can see, the auto loan refinancing process can be simple and straightforward. However, it's not for everyone. Before you can decide if refinancing is a smart move for you, you must research current loan terms and weigh the pros and cons as they apply to your situation.