Anyone wanting to find answers to “how does car loan refinancing work” might probably be considering going for one or knows a thing or two about car finance. At times, borrowers who go for car finance may along the line seek for refinance for various reasons.
However, not every customer may be eligible to refinance or not every lender offers customers the opportunity to refinance. In this article, I’ll be talking about car loan refinancing, how it works, who is eligible, how it benefits or hurts the borrower etc.
What is Refinancing?
Refinancing is simply replacing an already existing loan with a different loan under fresh conditions. People normally go for refinancing when their finances makes it difficult for them to be able to settle the existing loan
How Car Loan Refinancing Work
Car Loan Refinancing is the act of going in for a new car loan to replace or payoff an existing car loan. The new loan which is what we term ‘refinance’ comes under a different terms and conditions all together which varies from lender to lender and also the situation of the borrower in question.
People who go for car loan refinancing are probably in a financial distress which makes it difficult for them to make the agreed monthly payments on due dates etc. However, have it at the back of your mind that not all car loan refinancing applications are approved. Lenders look at certain factors before approving or rejecting a refinancing application.
Hence to be sure whether you qualify for a refinance or not, you may want to enquire from your lender. Also, not all lenders offer refinancing options.
For some people, refinancing offers them the opportunity to bargain for a better deal and save up some money. Whereas to others it may just be a way out of a really uncomfortable situation.
READ ALSO: How Does Prequalifying For A car Loan Work?
When you should think of Refinancing your Car Loan
You shouldn’t just get up and apply for refinancing. There are certain things one must think through before refinancing. Here are some of them;
Refinancing will be a good idea if you realize a significant reduction in interest rate as compared to the rate at which your existing loan was given. It’s not ideal to refinance your loan if interest rates are higher or the same. A reduced interest rate helps you to save some money when you refinance provided you don’t increase the loan duration.
High monthly payment
Refinancing may be an option if you realize your monthly payments are too high for you. Refinancing can help you go for a different offer that enables you to reduce your monthly payments to an amount that doesn’t put too much stress on your budget. An extension of your loan duration can help to reduce your monthly payment, however that also means that your loan will cost more to service.
A better credit score
An improved credit score may push you to apply for refinancing since you are in a better position to get a better deal. This is so because lenders usually look at your credit score when giving out loans as a lower credit score means higher interest rate or higher monthly payment.
Documents Required For Car Loan Refinancing
- Social Security number
- Driver’s license
- Proof of insurance
- Copy of your original contract
- Pay stubs