What Is Refinancing a Car?

Refinancing a car may sound confusing, but don't let that scare you. Auto refinance is simply the process of applying for a new car loan to pay off your existing car loan, hopefully with a better interest rate and better terms. Under the right conditions, refinancing your auto loan can lower your monthly payment and save you thousands of dollars over the life of your loan.

When you refinance, you are transferring your car's title from your current lender to a new lender. Your new lender pays for your existing loan, and under your new agreed upon terms, you begin to pay back your new lender. Just like getting your initial loan, you want to shop around for the best lender to refinance with, and you should consider both the benefits and the drawbacks before making your car refinance decision.

Benefits of Refinancing Your Car

There can be huge benefits to refinancing a car. They can be especially advantageous if your credit score has improved or if interest rates have gone down since you first financed your car.

  • Reduced Monthly Payments – You may be able to lower your monthly payments thanks to a lower interest rate or longer term.
  • Lower Interest Rate – If your credit score has improved or the market is in a better condition than when you first got your loan, you may be able to get a lower interest rate and pay less over the life of the loan.
  • Longer or Shorter Term – Perhaps your cash flow has increased or decreased. In either situation, refinancing may be beneficial for you as you can manage your loan term to be longer or shorter during the car refinance process.
  • Remove or Add a Co-signer – If you would like to remove or add a co-signer to your loan, refinancing may be the right decision for you, as you will be under a completely new loan contract.

Drawbacks of Refinancing Your Car

Refinancing is not always the perfect solution. Here are some important factors to consider before you refinance.

  • May Involve Transaction Fees – The refinance process often includes extra fees and charges such as the lien holder fees (a fee to change the title of the car). There also may be prepayment fees, but if your new loan terms are enough of an improvement, refinancing can still save you money.
  • Can Increase Total Interest Paid – If you refinance with an increased loan term and without a significant interest rate drop on your new loan, you will end up paying more interest over the life of your loan.
  • Be Aware of Pre-Computed Loans – In the case of a pre-computed loan, prepaying will require you to pay the entirety of the loan, including total interest over the life of the loan. If you have a pre-computed loan, refinancing will not be the best decision because you will have to pay the entirety of the loan's interest, as well as the interest on your new refinanced loan.

In theory refinancing sounds great, but what about in practice? Imagine our friend John took out a loan of $65,000 and currently has $45,000 left to pay off. His monthly payments are $650 and the loan had an interest rate of 3.99 percent. He attempts to refinance his remaining balance of $45,000 for a term of six years and new interest rate of 1.99 percent. With just a $14 increase in his monthly payments – from $650 to $664 – his loan term decreases by seven months and interest costs over the life of the loan decrease by $3,542. As you can see, refinancing has very real benefits and can catalyze positive change in your loan terms.

You can use LendingTree's auto loan refinance calculator to help calculate your refinance situation and decide if refinancing your car is right for you. If you do elect to refinance, don't forget to shop for the best possible lender.

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