What Is Car Loan Refinance?

Car loan refinance is essentially trading in one car loan for another with a more favorable interest rate. When you finance a car, you are taking out a loan to pay off the amount not covered by your down payment. This is usually all of the car's price. Depending on many factors including credit score, down payment and other pertinent financial information, you'll receive an interest rate on the loan you take out, which is a percentage of the loan calculated annually. It is also known as the APR or annual percentage rate. This rate itself is broken down into even tinier fractions and accrues on a daily basis. Interest rates are some of the least understood elements of finance, and probably for good reason, because they are a source of profits for whoever is lending you the money.

Car loan refinance can help mitigate some of the monthly cost by getting you a new loan with a lower interest rate, saving you money over time. A car loan calculator will tell you how much interest you will pay over the life of your loan. With this information, you will get a better idea of the money that is tacked on to the price that is advertised. Interest is how lenders make their money, but refinancing lenders can ease the pressure somewhat by lowering the rate.

Take an example: Say you buy a car for $15,000 with zero down. So you have to borrow the entire amount. Maybe your credit rating is not great, so you receive a 12% APR over 60 months. Based on this, your monthly payment will be $334 and you will pay over $5,000 in interest over the 5 years. Thus, the real price of the car is over $20,000.

By refinancing, you can alleviate this to a certain degree. By paying your monthly payments regularly and on time, even with bad credit, it will improve over time. Say that you have paid off the loan down to $10,000. You decide to refinance, and after the application is approved, you receive a new rate of 7% for 60 months. Your new monthly payment will be $198, and the amount of interest paid over the life will be less than $2,000. Of course, you can refinance for a shorter amount of time, paying more per month but less interest. There are many combinations that can work for car refinance. You have to find what is right for you.

Refinancing your car loan is a great way to save money each month and consolidate some of your debt. All parties are left happy because your original lender gets paid off, your new lender is earning a little interest from your loan, and you are paying less each month. Car refinance is a win-win-win situation. If the time is right and you meet the conditions, it is never too late to apply.