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Refinancing an automobile has many advantages, not the least of which is lowering the total amount that will be needed to pay off the vehicle. This is because most lenders that specialize in refinance will offer a lower interest rate than what many owners were forced to accept when the original purchase was completed. But there are other benefits of refinancing, and car owners should take note ? if money management is critical ? there are ways to save big now and pay a little more overall, and methods to pay down the loan quicker without coming out behind in terms of the bank account.
1. A Lower Interest Rate
Many vehicle owners had to accept a high APR because of limited or negative credit history. But after a certain number of payments have been made in a timely fashion and the owner wants to refinance, there are lenders waiting to do business. If the original loan was for 60 payments, and the owner has made 27 of them, refinancing for 36 months would mean three additional payments ? 63 in all ? but the lower interest rate probably means less overall finance charges in those 36 payments. Money has been saved.
2. A Good Credit Reference
The first loan having been paid down on schedule is already helping the credit score. Refinancing will introduce a new debt that the credit bureaus will notice. In addition to lowering the interest rate, the new loan package will be another positive credit reference.
3. Optional Payment Terms
Refinancing usually means the borrower will be able to select one of several term lengths for the new loan. If the idea is to pay down the car loan more quickly, getting a lower interest rate is the obvious choice, because the owner will now be paying more principal each month. This matters greatly when the depreciation of the vehicle is considered.
4. Getting Ahead Of The Car?s Value
Often the high interest rates attached to the original loan means that most of the first two years? payments are to reduce the accrued interest itself. Problem is, the car?s value may be lower than what is still owed in principal. Often referred to as an upside down loan, this can be fixed by refinancing, where the principal is paid down more rapidly and the value of the car is now more than what is owed on the loan.
5. Lower Monthly Payments
If the owner is not in an upside down loan, it may be better from a money management standpoint to refinance simply to lower the monthly payments. The lower interest rate can be combined with a longer loan term, which may still result in less owed over the life of the loan while keeping more of the owner?s paycheck in the wallet.
Joann Carlisle is a writer who looks forward to sharing her knowledge and advice with readers. For more on auto loans, Grad Money Matters gives readers information on how to refinance an auto loan.
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