4 Tips for Refinancing a Car That Has a 2nd Lien

A 2nd lien on a car is similar to a home equity loan. It allows a borrower to use the equity already built up through a few years of making car payments to gain immediate cash. This is a less popular option than a home equity loan, but it does provide a good alternative for non homeowners who need an asset to secure a loan. Refinancing one or both of the loans, though, becomes more complicated as a result.

#1 Refinance and Consolidate

Instead of refinancing just one of the two loans, it may be better to consolidate the two loans in the process of refinancing. You will already be going through the hassle of a refinance, and you will have to pay refinancing fees. It is best to get the most out of the process by simplifying your loan as well. Get a payoff quote from both lenders; a payoff quote is typically the sum remaining on the car loan plus a fee. By taking a new loan in a large enough amount to cover both payoffs, you can move forward with only one loan on the vehicle.

#2 Shorten Loan Terms

When possible, shortening the length of your loans will save you money. By refinancing to a shorter loan, you will get a lower interest rate and build up equity faster. Of course, short loans cost you more on a monthly basis. However, since they are lower risk for the lender, you will have more control over terms and less expense in the process. Consolidating or refinancing to a longer loan will rarely be the best option. The only time it should be pursued is if you face default on one or both of the loans due to a change in your financial situation that makes you unable to pay.

#3 Choose Timing Wisely

There is no "right time" to refinance, but some times are better than others. Refinance only after you have paid down a large sum on both of the loans against your car. Refinancing too early will dip your credit score even further, and you will not get the best deals on the loan. You should also refinance at a time when the market is favorable. This is typically when national prime interest rates are fairly low but the credit market is not too tight. To find the ideal circumstances, pay attention to advertised loan rates and look for sharp drops.

#4 Notify Insurance Company

You may need to have particular insurance provisions mandated by your new lien holder. Failing to meet insurance requirements imposed by your new lender can result in financial losses if the car is wrecked and then repossessed.These can be different than those mandated by your previous lenders. As a result, it is important to ask your new lender about these requirements and notify your insurance company immediately. In most cases, you will have lower insurance payments if you consolidate your loan than you did when you had two active lien holders on the vehicle.


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