How Does Auto Refinancing Work?

What is an Auto Refinance?

An auto refinance happens when a consumer decides that they could get a better interest rate or better terms on their loan. They know they are paying a high interest rate, and that means they are paying more money every month just to satisfy the bank. So, they contact another bank that also offers car loans, and ask them to give them a quote on a new loan for the same car. This new bank will offer the consumer a new loan package, typically one that has a lower interest rate, which benefits the consumer. If the consumer accepts the new loan, this bank pays off the existing loan or old car loan, and then takes possession of the car title as collateral. The consumer then makes monthly payments to this new bank, just as they did to their old bank.

Anyone who is paying a high interest rate on their car should consider refinancing. If you are paying more than 7 percent on your car loan, you could cut your payments down by a substantial amount of money. In addition, anyone who has improved their credit by at least 50 points will want to consider an auto refinance. Interest rates on new and used car loans are determined by your credit score, so if your credit score has improved, you are very likely to get a lower interest rate.

When you refinance at a lower interest rate, your monthly payment will be reduced because you are paying less interest to the bank. You will pay more toward the balance of the loan or principal, because you are paying less in interest to the bank each month. This means that you will reduce the total amount you owe on your car, and when it comes time to trade the car in, so you can receive more money toward your next car. If you have equity in your car, meaning your loan balance is lower than the value of the car, this amount will come off of your new loan, and you can get more car, for less money.

The best place to refinance a used car is through one of the major online companies like Bankrate.com. They work with several banks to get you the best possible rate on your car loan. You can also go through one of the major banks to refinance a car. Sometimes this approach is better, since companies like Bankrate.com earn a commission on every refinance they secure. The loan company must make up the difference and they do this by adjusting your terms or increasing your payments. A few major banks to consider are HSBC, Capital One and your local credit unions. They may give you a slightly higher rate, but their customer service and benefits (like skipping a payment once in a while) might make it worth the extra expense.

If your credit score has improved and you have held your loan for a reasonable amount of time, you should refinance. Check your credit report and compare your score to the day you bought your car. If it is lower, go get a refinance quote--it is free and easy to do. Also, if you have a short term loan, a refinance with another company will probably be a better option than renewing with your current company. Lessee's can also consider a refinancing option if they decide they want to keep their car at the end of a lease.