Refinancing A Car Loan

The term “refinancing” should be familiar to anyone who has purchased a loan. Simply put, refinancing is the process of obtaining a loan to pay off an existing loan. Obviously it’s not quite as simple as it sounds, but understanding that basic description is enough to begin the process of learning about refinancing.

One of the best-kept secrets in the finance industry is refinancing. A great deal of time, trouble, and most importantly cash can be saved through this method alone. Home refinancing has been around for a long time now and is used by many people to save money on their loans and/or reduce their monthly payments. However, many people still balk at the idea of car loan refinancing despite being familiar with the benefits of refinancing a home loan. Those who have a less than perfect credit rating to back them up, in particular, are likely to react this way.

What exactly is different about car loan refinancing? In essence, nothing. At the basic level, car loan refinancing works the same as refinancing your home. In car loan refinancing, a new car loan is obtained in order to pay off the existing car loan. The new loan may have different (typically better) interest rates, a new lender, or both. Again, as in home refinancing, this is beneficial since car loan refinancing can make your monthly car loan payments lesser. Alternately lower interest rates garnered through car loan refinancing can be capitalized on to pay off the balance of the current car loan in a shorter period of time.

Very few people understand the time value of money–that the longer a loan is paid on, the more money is spent on interest charges. Take for example a 60-month loan for ,500 on a new Honda Accord and assume that the buyer’s credit is poor. The car dealer manages to get the buyer approved at 21% APR for that loan, making the monthly payments 6.38. By the end of the loan term, the buyer will have paid ,282.83 on interest charges alone–almost as much as the initial price of the vehicle (which, of course, is now worth far less than when it was purchased). Now, if the car loan were refinanced with another lender at 6% APR after the first few months, the monthly payment would have been 8.99, allowing the buyer to save as much as ,643 on interest charges. If the buyer refinanced at the lower APR but retained the same monthly payment, the term of the loan would be shorter and the interest savings even higher.

Record numbers of homeowners refinanced their homes and saved thousands of dollars during the years 2001 and 2002. More car owners are beginning to realize the benefits of car loan refinancing every day. With the steady drop in interest rates, car loan refinancing is fast becoming a trend as more and more people realize how much money can be saved simply by refinancing a car loan.