Refinancing your car really means replacing your existing loan with a new one. Essentially, you pay off the current loan completely using the money from a new lender. For most, the choice to refinance is tied to the cost of an existing loan. If your credit score was lower when the loan was originated, you might be paying higher interest rates. You might have taken a very short-term loan and want to extend the term. For others, the decision to refinance might be influenced by the existence of a co-signer. If your goal is to lower your monthly bills or cut down on the cost of financing, a refinance loan would help.

Lowering Your Payments

To cut down on your monthly expenses, you have two options when looking at a car refinance loan.

1. Lower Interest Rates – If your interest rate was high when you signed for a loan, you might be able to lower the cost of the loan with a lower interest rate. Having a car loan and making timely payments can help improve your credit score, so it is possible that a year into the loan will allow you to negotiate a more favorable interest rate.
2. Extended Loan Terms – Paying less per month often means paying on your car for a longer period of time. Many lenders now offer loans that extend for 72 months or more, but you may have chosen a shorter option when buying your car. A shorter loan term means higher payments, and any changes to your financial situation could leave you struggling to make those high monthly commitments. Refinancing to extend your loan term is one way to lower your payments.

Add or Remove a Co-Signer

When you first signed for a loan, maybe you didn’t get the best rate because your credit is less than perfect. In those situations, the addition of a co-signer can help your refinance into a lower interest rate and correspondingly lower payment. The reverse is also true. Maybe you had a co-signer when you first started the loan, but now you would like to be the only name on the loan. You’ll need to refinance to remove the co-signer.

Taking the Driver’s Seat on Your Auto Loan

Whether you want to add or remove someone from your loan, lower your monthly payments or pay less over the life of your loan, refinancing can be a great option. While extending the term of your loan means paying more for your vehicle, affordable payments can reduce your financial stress. Paying off a car loan gives you more financial freedom, so be sure to take the steps necessary to effectively manage your loan.

Sources: Bank of America