How Does Refinancing An Auto Loan Work – Car refinancing is the process of paying off your car loan and replacing it with a new one, usually with a different lender, with new agreed terms.
There are several possible outcomes and in many cases this involves saving money or finding a more affordable loan. Borrowers generally look for a lower monthly payment, a lower interest rate, a different loan term or a combination of these. Let’s look at each one in more detail.
How Does Refinancing An Auto Loan Work
A lower payment can be the result of a reduction in interest rates, an extension of the loan term, or both together.
Car Loan Refinancing: Your Questions Answered
When a refinanced loan has a lower rate than the current note, it can reduce the total interest paid during the life of the loan, in cases where the term is not extended or very extended. Interest rates vary depending on the lender, market rates, and factors such as the borrower’s credit score.
– By extending the term of the loan, the amount borrowed is repaid over a longer period of time, reducing the monthly payment required to reach that amount. However, it can also mean you end up paying more for your car in total, including interest.
– A loan can also be refinanced to shorten the term, for example when the borrower wants to pay off the debt faster and save. Depending on the interest rate, a shorter loan may increase the monthly payment but decrease the total interest paid.
Keep in mind that refinancing a car may incur transaction fees, either charged by the lender, paid in advance, or included in the loan amount on which you pay interest. This forms the annual percentage rate (APR) of the refinanced loan.
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An automatic refinance calculator is a useful way to estimate what refinancing a car can do for you. It allows you to enter the loan balance, monthly payment and APR of your current loan and compare it to the refinanced amount, loan term and APR of a potential new loan to estimate how monthly default payments and total interest payments will change.
Let’s say you took out a loan for $19,500, about the average price of a used car, with an APR of 7 percent and a monthly payment of $386 spread over 60 months.
You are now 12 months into the contract and want to refinance at a lower rate. After paying off your loan amount for one year, the current balance is $16,125. Use this as the amount you want to refinance, APR now at 3.5 percent, and because you don’t want to extend the total amount of time you have to pay the car, a term of 48 months, the calculator estimates that the monthly payment drops to $360, a savings of $26 per month.
But it estimates long-term interest savings much greater. While you would have paid $2,409 on the remainder of your current loan, the new interest cost is only $1,179, a potential savings of $1,230.
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You can see in the table above how the interest payments vary when you refinance the same amount, with the same APR, for other loan terms, including shorter to 36 months, choose a different term of ‘ 60 months, or extend to 72 months.
The general advice to get a good car finance deal is to shop around. The application is often free and you usually need to provide the lender with some personal information to find out if you qualify and, if so, what kind of rate they will offer. You can read more about this in “How do I refinance my car?”
Even if you recently bought a car using a loan, there is no time limit before you can apply for a refinance. So if you think you didn’t get the best deal the first time around or your credit score has improved, you may want to take advantage. You can also apply for bad credit car refinancing options.
We accept applications from consumers with all types of credit, including bad credit, although we do not accept applications to refinance loans from existing Santander Consumer USA and Chrysler Capital customers.
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Applying online is quick and easy. It only takes a few minutes to complete our secure application and get an instant decision. If approved, the process is also simple: just fill out and return the forms and let us take care of the rest.
It’s common for people new to financing to wonder how auto refinancing works, and it’s a question worth asking. If you take the time to understand the process, you may be able to find a car loan with better terms for your situation and enjoy a more comfortable journey to have a vehicle.
These statements are informative suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.
Is not a credit counseling service and makes no representations about the responsible use or recovery of consumer credit.
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* “Bad” or “Bad” credit is generally considered a FICO score of around 600 and below by sources including the Consumer Federation of America and the National Credit Reporting Association (reported by the Associated Press) , Bankrate.com, Credit. com, Investopedia, NerdWallet.com and others. The Congressional Budget Office identifies a FICO score of 620 as the “cut-off” for a first class loan. FICO scores are not the only factor in credit decisions from and Santander Consumer USA.
Rob Looker is a senior writer for , I write about cars, money and their meeting place at the intersection of direct car loans. I’m a big fan of fancy cars and have a lot of experience with less than… If you’re looking to make a big purchase like a car, you may need to take out a loan to cover the costs. Personal loans and car loans are two of the most common financing options. Assuming you meet their respective loan requirements, they can be relatively easy to obtain.
So what is the difference between the two? A personal loan can be used for many different purposes, including buying a car, while a car loan (as the name implies) is for the sole purpose of buying a vehicle. Each type of loan has its advantages and disadvantages; it is important to weigh and compare them before drawing on the dotted line.
A personal loan provides the borrower with money from a credit institution (usually a bank), in a lump sum that the borrower can use as he sees fit, such as for a vacation, wedding, or home improvement.
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A personal loan can be secured against something of value, such as a vehicle or home, which allows the lender to seize your assets to recoup their losses if you fail to repay the loan. However, many people choose an unsecured loan, which means that the loan is given without collateral.
Two important elements that affect the total amount paid on a loan are the interest rate and the term of the loan. A personal loan calculator can be a useful tool to determine how these factors affect what you pay each month.
In general, unsecured loans have higher interest rates than comparable secured loans with collateral attached. Unsecured personal loans also have much stricter approval requirements, so you want excellent credit on your part. If yours is in bad shape, a personal loan may not be an option.
Your credit score affects both the loan amount and the interest rate, which can be fixed or variable. The better your credit score, the higher your borrowing capacity and the lower your interest rate. Conversely, the worse your credit, the lower your borrowing capacity and the higher the rate.
Benefits Of Auto Loan Refinancing
Personal loans have a fixed repayment period, expressed in months: 12, 24, 36, etc. Longer loan terms lower your monthly repayments, but you pay more interest over the life of the loan. Conversely, a shorter loan term means higher monthly repayments, but usually less interest because you pay off the principal faster.
Most lenders accept online applications for personal loans, and you can often get approved for a car loan on the spot at the car dealership.
A car loan is secured against the vehicle you want to buy, meaning the vehicle serves as collateral for the loan. If you fail to make your repayments, the lender can repossess the car. The loan is repaid in fixed installments over the term. Like a mortgage, the lender retains ownership of the asset until you make the final payment.
To determine which interest rate and loan term best suits your needs before you go to the dealer, consider experimenting with an automatic loan calculator first.
Refinancing A Car: What Are The Pros And Cons?
Since the lender has financial control over the car — it’s a secured loan — the debt is considered a lower risk, which usually translates into a much lower interest rate for the borrower. Interest rates are also fixed, so borrowers are not subject to the increases that can be associated with unsecured personal loans.
Most car loans are fixed for 36, 48, 60 or 72 months. And like the personal loan, the shorter the term, the higher the monthly repayment and vice versa. A below average credit history is not necessarily required
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