The term “refinancing” should be well known to anyone who has purchased a loan. Simply put, refinancing is the process of  acquiring a loan to pay off an existing loan. Obviously, it is not quite as simple as it sounds, but learning that basic description is enough to start the process of learning about refinancing.

One of the best-kept secrets in the finance business is refinancing. A great deal of trouble, time, and most importantly cash can be saved through this method alone. Home refinancing has been around for a long time now and is applied by most people to save money on their loans and/or lower their monthly payments. However, many people still balk at the idea of car loan refinancing despite being familiar with the advantages of refinancing a home loan.  In particular, those who have a less than ideal credit rating to back them up are likely to react this way.

Green car under the tree

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What precisely is different about car loan refinancing? In reality, nothing. At the basic level, car loan refinancing works similar to refinancing your home. In car loan refinancing, a new car loan is acquired in order to pay off the existing car loan.  The new loan may have a new lender, different (typically better) interest rates,  or both. Again, as in home refinancing, this is advantageous since car loan refinancing can make your monthly car loan payments lower. Alternately, lower interest rates acquired through car loan refinancing can be capitalized on to pay off the balance of the present car loan in a shorter period of time.

Very few people understand the time value of money–that the longer a loan is settled, the more money is spent on interest charges. Take for instance a 60-month loan for $16,500 on a new Honda Accord and presume that the buyer’s credit is bad. The car dealer manages to get the buyer approved at 21% APR for that loan, making the monthly settlements at $446.38. By the end of the loan term, the buyer will have paid $10,282.83 on interest expenses alone–almost as much as the initial price of the vehicle (which, of course, is now worth far less than when it was  bought). Now, if the car loan were refinanced with another lender at 6% APR after the first few months, the monthly payment would have been $318.99, allowing the buyer to save as much as $7,643 on interest costs. If the buyer refinanced at the lower APR but maintained the same monthly payment, the term of the loan would be shorter and the interest savings even higher.

Record numbers of homeowners refinanced their homes and put aside thousands of dollars during the years 2001 and 2002. More car owners are beginning to realize the advantages of car loan refinancing every day. With the steady drop in interest rates, car loan refinancing is fast becoming a trend as more and more individuals recognize how much money can be saved simply by refinancing a car loan.

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