What Is Car Loan Refinancing?

If you find that making your monthly car payments is getting difficult, looking at car loan refinancing may be a good option. But before you jump into anything, you should understand the basics of car loan refinancing.

When you first purchased your vehicle, you were given a loan by a financial institution. The lender agreed to pay for the car upfront, and you agreed to pay the lender back that money plus interest in monthly installments. Often times the rate you are locked into is high in the beginning and this can make your monthly payments high. When you refinance you essentially sell the original loan to another lender. This new lender takes the debt, and you pay them instead. Doing this can often lower your interest rate and cut your monthly payments down quite a bit.

In short, no. The car becomes collateral. You also won't have to make another down payment when you choose to refinance. The new lender assumes the debt for the vehicle. If you default the bank can take possession of the car, just like in the original loan terms.

Even with credit that is less than perfect you can still find lenders that will refinance your car loan. You will generally need to have made faithful and full payments for at least a year and have proof of steady income going back at least a year. Finding a lender to refinance with less than perfect credit may be more of a challenge, but the lenders are out there. You may not be able to cut the rate as much as you want, but you can still generally save some money.

Your savings will depend on several factors. Most people refinance their car loans when their original rate was high. The amount you save will depend on the original rate and the rate you are offered through the refinance. Most people are able to shave 3% or more off the interest rate.

The savings will also depend on how long the refinanced loan is for. If you finance the new terms over a longer period of time you may save more money monthly but end up paying more in the long run with interest.

Refinancing won't hurt your credit at all. In fact, making on-time payments can help your credit score. You may see a temporary decrease in your score right after you apply for loan refinancing, but this is because every time your credit is run that shows up on your report as an inquiry. Too many inquiries can show potential lenders that you are in a desperate situation. The best way to avoid this is to only apply for refinancing with the lenders who have offered you the best rates based on their preliminary applications.