Whether you have prime credit or not you might not have to wait till the end of the term to qualify for a lower interest rate on your car loan. In this article we will discuss what options you can have when you are bound in refinance a car loan contract to potentially save hundreds or even thousands of dollars in interest payments.
People who don’t have excellent credit tend to run into these tough car financing options. Because of their bad or undeveloped credit, they get higher interest rates which leads to higher interest payments and takes them a long time to pay off the principal.
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If you are in a car loan contract with high interest rate you can potentially reduce your interest payments by refinancing a car loan.
How does car refinancing work?
Refinancing a car loan might sound complicated but if I were to put it simply its like purchasing your car all over again but the only difference is that you already know the purchase price of the vehicle as you are the owner. And you will still have to pay only the remainder of the loan, refinancing doesn’t add anything to your loan.
When you refinance your vehicle, the lender needs to assess many things before committing to giving you the loan amount. The lender first of all checks your credit to make sure you make enough money to pay for the car payments every month, then he also checks to see if the car is worth what you say just so that if you default on the loan, he can sell the car and recover his loan amount.
When the lender gets answer to all his questions above, he approves you and issues a new financing contract between you and him and pays off the loan on the car to the previous lender in full.
Am I eligible to refinance a car loan?
Just like a regular car loan you need to requalify for refinance of a car loan. Every lender out there will have the same criteria for issuing you the loan amount with slight differences that change from person to person. Normally lenders ask for these things:
- A source of income meaning that you are actively employed and can pay off the loan and this needs to be proven by showing a pay stub or something else like that.
- Enough financial flexibility to affirm the lender that you will be able to pay off this loan and won’t have any issues at all. It is called debt-to-service ratio meaning you earn more than you owe.
- A credit history set under your name even if its brand new they need to know you have been in the system long enough.
- A permanent address that you can call home and that can receive your mail.
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Is it easy and beneficial to refinance a car loan?
Car refinancing is not rocket science and there is a lot of text available on this and the information is readily available. You can go to any bank or lender place and find out what a car refinancing is, its basically getting a loan on the remainder of your car loan at a cheaper rate.
The idea is to save as much money in interest as you can, now let’s discuss how can it be beneficial for you:
- Lower Interest rates:
The main reason why people refinance their car loans is that they want a better interest rate so that they can pay off the car faster and save money on interest. Let’s say when you purchased the car, you had bad credit and now that you have had the car for a couple of years and you have been paying your bills on time which means your credit rating has improved by a lot.
And if that is the case you are most likely eligible for a better interest rate when you refinance your car loan. Even the slightest change in the interest rate can save you thousands of dollars over the course of your loan term.
- Extending loan term:
Another reason why people go for the refinancing option is that they want to increase the loan term so that they don’t have as much burden every month to pay off the loan. A longer term ensures lower monthly payments but you have to be cautious because choosing this route will cost you more in the long run.
Basically, the longer you keep a loan the more you pay on interest so the best approach is to pay off the loan as soon as you can.
- Change ownership or remove co-signer:
If you have a co-signer on your original car loan and you are going to refinance your car loan that is the perfect time to remove any and all co-signers from the new loan contract. Normally parents become co-signers on their kid’s vehicle and when kids grow up and want to refinance a car loan that is the perfect time to take the parents off as co-signers and make a fresh contract that will help the kid take full responsibility of the loan.
In conclusion I will say that refinancing of a car loan is an amazing tool that anyone can use at any point in their life. It is super beneficial and if you can find a good deal you can potentially save thousands of dollars over your loan term and who doesn’t like saving money.