Why Refinancing Car Loans can Save You Money

Refinancing car loans can reduce your monthly payment and help you avoid defaults on your loans. There are costs involved and borrowers need to be certain that refinancing doesn’t cost more than it saves. However, as the following information explains, if refinancing is an option for you, it is almost always preferable to defaulting.

Defaulting Costs You Your Car
What does it mean to be in default? Every loan you take out is a contract between as borrower and lender with repayment terms spelled out. Your loan documents will specify at what point, if you miss payments, the loan is considered in default.

Once a loan goes into default, the lender - whether it is a bank, credit union or auto dealer - can repossess your vehicle and sell it to offset the debt. If you default on a loan, you lose your car.

Defaulting Costs You Your Credit
Your ability to borrow is based on the financial risk you represent to a lender. Your credit score represents your track record as a borrower paying off debt. If you pay loans on time your score will be high. If you have late payments or have unpaid balances that you have not addressed, it will lower your score. A default on a loan is a serious downgrade to your credit rating and remains on your credit report for seven years.

Improving your credit score is a long-term process in any event, a default makes it harder.

You Still Owe
If you default on a loan and your car is repossessed and sold, the amount of the sale is applied to your loan. If that amount does not wipe out your loan balance, you still owe the difference. If it wipes out the current loan balance but not the payments you missed, including any penalties, you still owe that amount.

A default eliminates your need to make monthly payments, but it creates more problems than it solves and, in most cases, doesn’t absolve all your debt.

Refinancing Can Save You Money
When refinancing car loans, you take out a second loan and pay off the first loan with it. The goal is to get a lower interest rate on the second loan, reducing your monthly payments and overall interest expense by more than the cost of closing the second loan.

If you are facing a default situation, the lower payments can be the difference in keeping or losing your car. However, if you are having trouble paying for the first loan, you might have trouble qualifying for refinancing car loans. This isn’t the end of your options. Even if you must accept a higher interest rate, you could extend the payout period, again reducing your monthly payment. While you end up paying more, you keep a default off your record and keep your car.

Refinancing Can Repair Your Credit
Another reason refinancing car loans is a better alternative than defaulting regards your credit history and score. If you are in danger of defaulting on a loan, you are also in danger of harming your credit score. Refinancing car loans allow you to get a lower monthly payment that you can afford, pay it regularly and improve or begin rebuilding your good credit standing.

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