Refinancing your car happens when you replace your car loan with a new loan from another lender with different interests. This is a strategic, money-saving switch that lets you adjust the conditions of your car loan – the months left and the amount due –according to any new changes in your financial plans.
This article covers the details of refinancing your car: how to do it, when to do it, and if it will lower your credit score.
How Do You Refinance Your Car?
To refinance your car, you need to pay off the loan attached to your current vehicle. This secures a lower interest rate and a lower monthly payment process.
This happens the way your initial financing of the car occurred:
- You apply to multiple lenders
- Compare interest rates and charges
- Pick the option that offers the best terms
After you’ve accepted the loan offer, the refinancing lender will send a payment to the original lender. The refinancing lender now has a lien over your car – that is, the legal right to take away your vehicle if you don’t make payments. Now, you’re obligated to make payments to the refinancing lender instead of the original lender until all the charges are paid off.
Refinance Your Car: When to Do It and When to Avoid
You should refinance your car in the following circumstances:
- When your vehicle is holding its resale value
- When the interest rates are declining
- When your credit score is high
- When you need to cut down your expenses
Don’t refinance your car in the following circumstances:
- When interest rates have increased relative to when you took your original car loan
- When you’ve paid off a significant chunk of your car loan
- When you’ve purchased a new car with high mileage
- When you’re planning on seeking a mortgage or other large loans.
If You Refinance Your Car, Will You Lower Your Credit Score?
Temporarily, yes. All types of refinancing affect credit scores; so does refinancing an auto loan. However, that’s a small price to pay in exchange for the new loans that will help you save money and avoid car payments that you can’t afford.
Can I Extend the Term of My Loan?
When you refinance with an amount lower than the original lender’s, you can extend your loan length. However, keep in mind that you won’t be saving money – you’ll actually pay more in interest throughout your loan.