When Refinancing Makes Sense
As mentioned, if you pay high monthly payments and want to lower them, then refinancing a car loan makes sense. In addition, if your credit score has improved by as little as 50 points, or if you can lock into a new loan with an interest rate that is roughly 1% lower than the original loan, again this is a good decision.
Refinancing a car loan is often beneficial from a financial perspective. As an example, if you have paid on a current $35,000 loan for two years with terms consisting of 8.5% and six-years but still owe slightly over $29,000, refinancing the last four years at 3% less would reduce the monthly payment by $35 but also save you a total of $1,680 by the end of the loan.
If you decide to refinance, it is important to shop around for the best rates and terms. If you have good credit, even more options become available. Along with the original lender, it is to your advantage to look at what other banks, credit unions, and finance companies offer.
The Process of Refinancing
The process associated with refinancing a car loan is very similar to when you took out the original loan. If the loan is taken out with the same lender, the process is relatively simple whereas if you go with a different lender, you may be required to provide much of the same documentation you did prior. In both cases, new loan papers are reviewed and executed.
To reduce the duration of the loan, you can always lock into a lower interest rate but continue paying the original monthly payment. The benefit is that this shortens the length of the loan due to the amount refinanced. Although your monthly payments would not change in this scenario, you ultimately pay less in interest over the life of the loan.
When refinancing a car loan, it is important to compare different options and always choose a reputable lender. That way, you end up with the exact interest and terms you want but more importantly, what is going to prove financially beneficial.