Loans with longer payment plans, such as auto loans, can be part of your budget during multiple stages of your life. As life goes on and situations change, a loan taken several years ago might not be the best solution against your new financial situation. That’s why it’s important to understand how to refinance a car.
In this article, we’ll help you understand how to refinance a car, how auto loan refinancing works, and how to evaluate if this is the best option for you. If you’re interested in better understanding this important financial option, go ahead and take on all this valuable information.
Refinancing a loan
Long-term loans, such as mortgages and auto loans, can become a burden in many ways — maybe the installments are not appropriate to your current budget, or you didn’t get the best deal back when you took out the loan.
A large monthly amount can have a negative impact on your finances. A contract that is better than ideal, with high-interest rates and a high total amount, can also take a hit on your finances long term. This is where loan refinancing options come into the picture.
Most lenders offer the possibility of taking a loan you already have and replacing it with a new one, with different conditions. Loan refinancing is most common with secured loans, such as mortgages and auto loans, because the lender has the security of owning the title of the asset until you repay the loan in full.
How auto loan works
Before getting into the specifics of how to refinance a car, it’s important to understand what an auto loan is and how it works. An auto loan is a secured loan used to purchase a car. This type of loan offers variable amounts of funds, according to the income and financial history of the borrower.
When getting an auto loan, you get the funds to buy a vehicle and repay it in installments over up to seven years. The title of the car is owned by the lender until you pay off the loan in full.
Refinancing an auto loan
When refinancing a car loan, you are taking out a new auto loan to replace the one you already have. So, how to refinance a car? To refinance an auto loan, you need to look for a new lender, because you’ll take out the new loan with a different lender from the previous one.
This means that, with an auto loan refinance, rates will probably change. A rule of thumb is that you’ll get lower installments with a longer repayment plan and higher interest rates, or lower interest rates with shorter repayment and higher installments.
Is refinancing a car worth it?
People used to get a car refinancing when they’re looking for one of these possible outcomes: lowering monthly installments, lowering interest rates, or lowering the total amount of the contract. Each of these scenarios has a downside, as explained before.
So, is refinancing a car worth it? It depends on your current situation and financial needs, compared to when you took out the original auto loan. There’s not an easy formula. The answer can vary between individuals.
A refinance can be worth it if you are on a tight monthly budget and need to lower your monthly installments to keep your vehicle, as long as you’re okay with likely paying it for longer.
Another good scenario is when your financial history or credit score has significantly increased since you first got the loan. Just as with most loans, car refinance rates are determined based on your credit score and history, so better numbers give you better rates and lower total amounts by the end of the contract.
In short, there are three common scenarios when it’s a good idea to refinance an auto loan:
- your credit score and history improved, which will likely guarantee you lower interest rates;
- you got a bad deal from an untrustworthy lender and be able to get better terms with another one;
- your financial situation has changed and the current monthly amount doesn’t work for you anymore — this goes for both lowering the installments because your budget is tighter, or increasing it because your income has increased and you can pay it off within less time.
If an auto loan refinance isn’t the best option for you, there are alternatives to get better rates or smaller payments. One way is to get a loan to pay off the auto loan in full and repay this new loan in installments. This can be a good alternative when the rates or installments are better suited to you than the auto loan.
OneBlinc offers affordable loans with competitive rates for all types of employers in need of extra funds to achieve their milestones, as a way to be a true alternative to the vicious cycle of predatory lending.
OneBlinc is a financial agency created to provide affordable credit solutions to underserved communities. We provide fair and affordable credit solutions for people that work hard but need some extra help. Get to know our team of experts dedicated to helping you find the best tools and solutions for your financial needs.
Unexpected things happen more often than we would like them to. That’s why OneBlinc is here to help, whether you have an emergency or just need that extra cash to go through the end of the month. We believe in people, and we understand that everyone might need money someday, somehow.