Most most people buy a car and then they have to finance it with a car loan, either through the dealership or through a third-party lender. Financing simply means paying off the car in monthly installments, with interest that accrues.
The alternative is to simply pay for the car outright, which will save you money, but isn’t very practical for most people. After all, the average price of a new car in 2019 was over $36,000 and the price is only going up. Most people don’t have that kind of money lying around — the average savings for an American in 2020 is $3,500. And even if they do, it might not be practical for them to spend that much in one lump sum.
There are lots of different routes to go when financing for an auto loan. In general, the less you pay per month, the higher your interest rate will be. And if you pay more each month, you’ll have a lower interest rate. So you can choose whether you want to pay a larger amount monthly, or a larger amount in the end. You will save money in the long run by paying more each month, but you’ll need to be confident that you can pay off the loan in a shorter period of time.
Of course, different lenders also offer different deals (and take into account factors like your income and credit score differently), so no two finance packages are quite the same. As such, you may find yourself wanting to refinance your vehicle at some point.
What is Refinancing and How Does it Work?
Refinancing a car is simply rebooting the financing part, with different terms, and usually via a different lender. In general, you and a new financier agree on terms that are more beneficial to you. The new financier then pays off your old financier in full, and you begin making payments to your new financier, based on your new agreement.
Step 1: Contact your financier: Let your financier know that you intend to refinance.
Contact the financier handling your current loan, and let them know that you are looking for better terms. It’s in their interest to keep you as a client, so they may be willing to offer you slightly lower payments, or less interest. If your credit has increased since your financing began, then you have a good shot at having an improved finance package.
Some people simply refinance to adjust their plan, rather than improve it. If you got a large promotion at work, you may want to pay more monthly in exchange for lowering your interest rates. Most financiers will gladly adjust your payment to interest ratio to better fit your needs.
Step 2: Determine your financing goals: Figure out what you would like your finance plan to look like.
You won’t always find your dream finance package, but it’s important to know what you’re looking for. Before moving forward, look at your budget, and determine how much you are willing to pay on a monthly basis. That will make the process of searching for the right refinance plan easier.
Step 3: Contact new lenders: Contact a variety of lenders to find out what plans they can offer.
There are lots of different lenders, from those who specialize in auto financing, to small credit unions and big banks. Contact numerous lenders, to make sure you get a variety of options. Most potential lenders will offer you a quote online after you input your current finance plan, income, and credit report.
Step 4: Choose a plan: Choose a refinance plan, and cancel your old one.
Once you’ve found the right refinance plan for you, you’ll have to apply for it. If you’re accepted, you can contact your initial lender, and let them know that you plan to refinance. You’ll pay back your original lender (either with a check from your new financier, or the financier will pay them directly), and then you’ll begin your refinance plan.
After refinancing keep an eye on your credit score. While taking out a new car loan in the first place can cause your credit score to go down, refinancing with a new lender usually impacts your credit score less because it’s replacing an already existing debt from the original loan.
Refinancing is a great way to find a payment plan that better suits your needs, and your budget. If you feel like you’re paying too much for your car, either in monthly payments or in interest, then refinancing may be perfect for you.