How Does Car Refinancing Work?

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


, - January 1, 2020

The goal of refinancing a car loan is to lower your payment each month. When you decide to refinance an auto loan, there are two ways you can save money: with a lower interest rate, or with a longer loan term. However, the savings you qualify for depends on many factors outside of your credit, including your vehicle and current loan.

How Auto Refinancing Works

When refinancing, you’re replacing your existing loan with a new one that has a better interest rate or longer term. You should check with your current lender first to see if they’re willing to refinance you, but it's typically done through a new lender. Our trusted partner can help you view and compare refinancing offers online right here.

You need to be able to qualify to refinance, and each lender has their own requirements that have to be met. The first thing that most lenders look at is your credit score. Good credit is usually a major factor for refinancing. If you originally took out a bad credit car loan, you may still qualify for refinancing if your credit score has improved since it began.

Another factor that determines whether or not you can refinance is your vehicle. Your car has to meet the lender’s age and mileage rules in order to qualify. Finally, the loan amount has to fall within a lender’s acceptable range.

Your eligibility for refinancing varies by lender and state, as well as a few other factors, including:

  • Your loan must be current – You must be up to date on your loan, as this qualification means your payments must be current.
  • Your vehicle must have equity – If you owe more on your loan than the car is worth, which is called having negative equity, you’re going to need to wait to refinance until you have equity in your vehicle.
  • You can’t refinance fleet vehicles – Your car must be for personal use only; vehicles used for business aren’t eligible for refinancing.

Refinancing Can Help Lower Your Payments

With the goal of a lower monthly payment, there are two ways you can achieve this: with a lower interest rate, or by extending the loan term. But only one of them saves you money on your loan.

Refinancing with a lower interest rate is the best way to save money, because this method lowers both your monthly payment and the overall cost of your loan. When you opt to stretch out your loan term and keep the same interest rate, your monthly payment decreases, but the overall cost of your loan goes up since you’re now making additional interest payments.

The good thing about this, though, is that if your situation changes, you can go back to making larger monthly payments whenever possible and reduce the amount of interest charges paid.

The Bottom Line

Now that you know what it takes to refinance and what your options are, you can begin looking for the refinancing solution for your situation. If refinancing doesn’t turn out to be the way to go, you could consider trading in your car for something more affordable, and we can help with that.

Here at CarsDirect, we work with a nationwide network of special finance dealerships that have the lending resources to assist people with bad credit, no credit, and more. Fill out our easy and fast auto loan request form now, and we’ll get to work matching you with a dealer near you.

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Meghan Carbary has been writing professionally for nearly 20 years. A published journalist in three states, Meghan honed her skills as a feature writer and sports editor. She has now expanded her skill-set into the automotive industry as a content writer for Auto Credit Express, where she contributes to several automotive and auto finance blogs.


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