While everyone who wants a car is aware they can find an auto loan to help them pay for it, many people are not aware of what exactly car refinancing entails. Refinancing is a powerful tool to help you manage an existing auto loan. Knowing about what it does and what it can accomplish is important for harnessing its helpful potential.
The Refinancing Process
When you refinance, you are basically seeking out someone to pay off your existing auto loan and give you a new one. The refinancing lender will take care of the remaining balance on the loan you currently have and then offer you a completely new line of credit with a new set of terms and conditions.
Here are some of the top reasons people refinance:
They Got a Bad Loan
Whether they were pressured into an unfavorable loan by a car dealer or they simply were not aware of how burdensome a loan would be, some people end up strapped down by bad auto loans. These loans can have harsh repayment schedules, unfair payment amounts, unreasonable interest rates or all of the above.
When you refinance, you get the chance to throw the baggage of a bad loan out the window. Shopping around for the best refinance rate and terms means you can get out from underneath a toxic loan and get back on a path to repayment.
Their Credit Improved
Your credit score is a large determining factor for your interest rate. If you have an improved credit history or have been making progress in the past year or so, you just might have a big enough credit score increase to get a better interest rate.
The National Interest Rates Changed
Lenders set their rates according to how the national economy is doing, especially the rates set by the Federal Reserve Bank. When the reserve cuts interest rates or several large banks change their lending policies, the interest you get on an auto loan can reflect this difference.
They Want to Pay the Loan Off Quicker
Some people end up doing well on their auto loan and want it paid off quicker than they initially expected. While they could just add to their payments every month, having a set payment schedule is helpful for keeping on track. A refinanced payment schedule could also gear more money spent every month towards the principal balance rather than just interest payments.
Trouble Making Monthly Payments
Personal finances can be a delicate matter. A number of mistakes or miscalculations could place someone in danger of defaulting on their auto loan. This can create a huge blemish on their credit history.
Many customers use refinancing to keep afloat. Refinancing can give them lower monthly payments. They can also be placed back on track if they were behind on their personal finances.
If any of these situations apply to you, refinancing could be your best option. You get the chance to wipe your old loan clean and start again on a new one that will hopefully place you in better financial standing.