What are car loan refinances?

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A car loan refinance is a type of automobile financing that replaces an existing car loan with a new one. A car loan refinance is most often used to lower a car loan’s monthly payments by taking advantage of lower interest rates, but it can be advantageous for other reasons as well.

In addition to standard auto loan refinancing programs, another variant of the car loan refinance are vehicle title loans, sometimes called title pawns and pink slip loans. The hallmark of title loans is that the car owner receives cash by converting a portion of the vehicle’s available equity into a secured loan.

Reducing monthly auto loan payments with a loan refinance

For many consumers, the most common reason to refinance a car loan is to reduce monthly payments by replacing the existing auto loan with a new one with lower interest rates. If the rate reduction is low enough, it will result in lower monthly payments.

For instance, suppose a consumer bought and financed a car one year ago with a $20,000 loan. However, because the consumer had bad credit at the time, the interest rate on the car loan was pegged at 10 percent to be paid over five years. The monthly payment for that loan would then be $424.94.

After two years of timely payments, the car loan borrower would have a remaining balance of $13,169 and three years remaining on the car loan.

Assuming the borrower used those two years to rebuild his or her credit score to “A” credit status, the borrower may now qualify for a refinance loan at only four percent (4.00%).

  • New payment. An automobile refinance loan for the $13,169 balance at a rate of only 4.00% and a loan term of three (3) years would result in a monthly payment of only $388.80.
  • Savings. That would be a savings of $36.14 per month or $433.68 per year. Over the remaining three years of the car loan, that would be an overall savings of $1,301.04!

A car loan payment can also be adjusted by lengthening or shortening the loan term. Refinancing the auto loan to a longer loan term would result in a lower monthly payment. Unfortunately, it would also mean paying more interest charges, over the entire life of the loan.

Conversely, the borrower can refinance to a shorter loan term. This will result in higher monthly payments to ensure that the amortized loan is paid off completely. However, the trade-off is that the borrower will be paying off the loan more quickly – and save months (or years) of interest charges in the process.

Car loan refinance options

Many lending institutions, including banks, credit unions and consumer financing companies offer automobile loan refinancing programs. The credit requirements for these refinance loans are typically similar to their requirements for automobile purchase loans.

The biggest difference, in many cases, is the value of the vehicle. Keep in mind that automobile loans, whether for purchase or refinance, are normally secured installment loans. The collateral for the loan is the vehicle’s title, which is kept by the car loan provider until the loan is paid off.

A car loan refinance provider would want to know that the vehicle’s value is greater than the loan amount. Most lenders will check the vehicle’s Kelley Blue Book (KBB) value, based on the automobile’s make, model, age and condition. If the car’s blue book value has dropped to near or below the requested loan amount, the car owner may not be able to obtain a standard car loan refinance. Similarly, car title loans are also dependent on the automobile’s Kelley Blue Book value.

But if the vehicle has maintained its value and available interest rates present opportunities for lowered monthly payments, many car owners who still have a loan against their auto may benefit from a car loan refinance.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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