Have a car loan and wonder if refinancing is the way forward? Heard the term and wondered what it is? We are here to help!
Auto loan refinancing is where you apply for a new loan to pay off the old one. You’re keeping the same car but are changing the way you pay for it.
Refinancing can allow you to pay a lower rate of interest, pay over a shorter or longer term or allow you to borrow a little more for something else. Much depends on your motivation for considering the new loan.
Auto loan refinancing
Auto loan refinancing is a formal mechanism for settling an existing car loan with a new loan. We settle the existing loan by early repayment with the proceeds from the new loan and your monthly payment automatically switches from the old lender to the new.
Reasons for auto loan refinancing vary.
Opt for a lower interest rate
We use this a lot for bad credit car loans. We use a bad credit car loan for 12 or 24 months to help rebuild your credit. Then, once your score has improved, we switch you to a lower cost loan at a much lower interest rate.
Your monthly payment might not change much but the amount of interest you pay will!
Opt for a short or longer term
If things are getting tight and you’re struggling to make ends meet, refinancing can help. Borrowing to pay off the loan over a slightly longer term should lower your monthly payments significantly.
It isn’t always a good idea because you will end up paying more interest over the term but it can work well for the right situation.
Conversely, if you’re finding it easy to pay, you could refinance over a shorter term. This can be useful if you initially took an 84 month loan but got a pay rise so want to pay the car off early.
The result is a shorter loan with a higher payment but much less interest to pay over the term.
Opt to borrow more
You can also use auto loan refinancing to borrow a little extra cash against the equity in the car. Say you bought a car for $25,000 and have paid half already. The car is worth $18,000 now so you have $5,500 equity which is the current value of the car less the amount left on the loan.
You could borrow that money back to pay off other debts or buy another car. As long as the value of the loan is less than the value of the car, you should be fine.
Auto loan refinancing does not work for everyone. It is a good idea to seek expert advice before you sign on the line and ensure you can afford the new loan.