"What happens when I refinance my car?"
This is a question you can hear a lot at Rivermark Community Credit Union. It’s a very understandable question to have: financial matters, especially those on major purchases like a car, can be confusing and hard to understand, and nobody wants to be left in a situation where they’re paying more for a car than it’s worth.
So let’s look at what happens when you refinance your car - and, beyond that, why it might make sense to refinance your car and in which scenarios you should consider it.
What does it mean to refinance a car?
Essentially, refinancing a car is like refinancing a mortgage or any other major loan that you’re repaying. You’re getting new terms on the loan, typically by transferring it to another party. (Some institutions will allow you to refinance their own loans, but this isn’t always the case.)
In other words, this means you have a loan due to Party A; Party B then pays Party A the full sum of your loan, and you now owe Party B the remaining balance instead.
At first glance, this may seem like a lot of work for no gain to you - after all, you still owe the same amount of money as you did before, right? The answer is more complicated than that. Refinancing is often done because Party B is simply offering you a better deal than Party A did, and we’ll cover this in more detail later. To put it simply: refinancing can save you money, either in the short-term, the long-term, or both.
What happens when you refinance your car?
When you refinance your car, there are typically a number of steps that you and your lending institution will go through. These may differ from lender to lender, but in general, the process will look much the same.
1. You provide the lender with information
This might sound like an obvious first step, but believe it or not, some people don’t realize it. A lender obviously won’t know what terms to set unless it has all the information. This typically includes:
- The vehicle’s make, year, model, and VIN
- The vehicle’s condition (Is it new? Pre-owned?)
- Your current lease’s terms, including full sum, remaining balance, and interest rate.
Your individual lender may want more information from you, however, so it’s always a good idea to ask first—but be prepared to bring all of the above to start.
2. The lender runs a Credit & Background check
Before agreeing to refinance a current loan, the lender will check your credit and often will run a background check as well. As with all occasions when a lender pulls your credit report, this will likely lead to a drop in your credit, though it will almost certainly be small and temporary.
3. The lender pays off your previous loan
Once a new loan has been agreed upon, then the lender will pay off your previous loan in full. You no longer have to make any new payments with your previous lender.
Important: It’s always a good idea to check in with your previous lender and make sure the balance has been completely paid off. While it’s very uncommon, the refinancing agreement may involve one final loan payment on your part to the previous lender. A missed payment could have serious repercussions for your credit, so always double-check to make sure nothing has slipped through the cracks.
4. Fees are settled and the lender makes a new loan
At this point, typically any additional fees the new lender requires - say, for checking your credit or simply for opening up a new loan - will need to be paid by you to settle at this time. Once that has been taken care of, the lender will create a new loan for you.
Even though this is refinancing an existing loan, this does count as a new loan, and too many new loans in a short period of time can negatively impact your credit rating, so be aware.
5. You make payments on your new loan
From this point on, it couldn’t be simpler. You pay off your new loan, payment by payment, exactly as you did your old one, until the loan is fully paid off.
So, if the end result is just the same as your previous loan, but with additional steps, why refinance your car?
Why should you refinance your car?
Refinancing a loan like a car purchase is typically done for a number of reasons, most commonly if you can get new terms and potentially a more favorable interest rate. Here are just some of the situations in which you might want to refinance your car.
1. You want to make lower monthly payments
When you refinance your car, even if the interest rate is exactly the same, you can start a new loan term with the remaining balance as principal. This means your monthly payments will be lower, which can make them more affordable month-to-month and will lower your debt-to-income ratio. However, longer repayment periods do mean you ultimately pay more with compound interest, so always use tools like a loan calculator to understand the full amount you’re paying.
2. Your income has increased
Perhaps the opposite is true. You have greater income now, so you can afford a higher monthly payment and, consequently, a shorter loan. Refinancing is a great way to do this.
3. Your credit has improved
Lenders will typically offer better rates to customers with better credit. If your credit has improved in-between taking on the first loan and now, you may be able to get a better interest rate, significantly saving you money in the long-term.
4. You want to remove a cosigner
This is related to the above point about your credit improving. Cosigning a lease can often be a hit on someone else’s credit, and if your credit has improved to the point where you don’t need their assistance, why not fly solo?
5. You want better rates
Sometimes, you don’t need a major life change to refinance a car loan. You may find a lender who can offer you much better rates for your loan than you had previously. In this case, it’s possible that you’ll save money simply by changing to the new lender, and in that case, who wouldn’t want a better deal?
If you’re interested in refinancing your car loan and want to see if you might be able to get a better deal with Rivermark Community Credit Union, contact them today.
Essentially, refinancing a car is like refinancing a mortgage or any other major loan that you’re repaying. You’re getting new terms on the loan, typically by transferring it to another party. (Some institutions will allow you to refinance their own loans, but this isn’t always the case.)
In other words, this means you have a loan due to Party A; Party B then pays Party A the full sum of your loan, and you now owe Party B the remaining balance instead.
At first glance, this may seem like a lot of work for no gain to you - after all, you still owe the same amount of money as you did before, right? The answer is more complicated than that. Refinancing is often done because Party B is simply offering you a better deal than Party A did, and we’ll cover this in more detail later. To put it simply: refinancing can save you money, either in the short-term, the long-term, or both.
What happens when you refinance your car?
When you refinance your car, there are typically a number of steps that you and your lending institution will go through. These may differ from lender to lender, but in general, the process will look much the same.
1. You provide the lender with information
This might sound like an obvious first step, but believe it or not, some people don’t realize it. A lender obviously won’t know what terms to set unless it has all the information. This typically includes:
- The vehicle’s make, year, model, and VIN
- The vehicle’s condition (Is it new? Pre-owned?)
- Your current lease’s terms, including full sum, remaining balance, and interest rate.
Your individual lender may want more information from you, however, so it’s always a good idea to ask first—but be prepared to bring all of the above to start.
2. The lender runs a Credit & Background check
Before agreeing to refinance a current loan, the lender will check your credit and often will run a background check as well. As with all occasions when a lender pulls your credit report, this will likely lead to a drop in your credit, though it will almost certainly be small and temporary.
3. The lender pays off your previous loan
Once a new loan has been agreed upon, then the lender will pay off your previous loan in full. You no longer have to make any new payments with your previous lender.
Important: It’s always a good idea to check in with your previous lender and make sure the balance has been completely paid off. While it’s very uncommon, the refinancing agreement may involve one final loan payment on your part to the previous lender. A missed payment could have serious repercussions for your credit, so always double-check to make sure nothing has slipped through the cracks.
4. Fees are settled and the lender makes a new loan
At this point, typically any additional fees the new lender requires - say, for checking your credit or simply for opening up a new loan - will need to be paid by you to settle at this time. Once that has been taken care of, the lender will create a new loan for you.
Even though this is refinancing an existing loan, this does count as a new loan, and too many new loans in a short period of time can negatively impact your credit rating, so be aware.
5. You make payments on your new loan
From this point on, it couldn’t be simpler. You pay off your new loan, payment by payment, exactly as you did your old one, until the loan is fully paid off.
So, if the end result is just the same as your previous loan, but with additional steps, why refinance your car?
Why should you refinance your car?
Refinancing a loan like a car purchase is typically done for a number of reasons, most commonly if you can get new terms and potentially a more favorable interest rate. Here are just some of the situations in which you might want to refinance your car.
1. You want to make lower monthly payments
When you refinance your car, even if the interest rate is exactly the same, you can start a new loan term with the remaining balance as principal. This means your monthly payments will be lower, which can make them more affordable month-to-month and will lower your debt-to-income ratio. However, longer repayment periods do mean you ultimately pay more with compound interest, so always use tools like a loan calculator to understand the full amount you’re paying.
2. Your income has increased
Perhaps the opposite is true. You have greater income now, so you can afford a higher monthly payment and, consequently, a shorter loan. Refinancing is a great way to do this.
3. Your credit has improved
Lenders will typically offer better rates to customers with better credit. If your credit has improved in-between taking on the first loan and now, you may be able to get a better interest rate, significantly saving you money in the long-term.
4. You want to remove a cosigner
This is related to the above point about your credit improving. Cosigning a lease can often be a hit on someone else’s credit, and if your credit has improved to the point where you don’t need their assistance, why not fly solo?
5. You want better rates
Sometimes, you don’t need a major life change to refinance a car loan. You may find a lender who can offer you much better rates for your loan than you had previously. In this case, it’s possible that you’ll save money simply by changing to the new lender, and in that case, who wouldn’t want a better deal?
If you’re interested in refinancing your car loan and want to see if you might be able to get a better deal with Rivermark Community Credit Union, contact them today.
