Have you ever been in a financial crunch when making a big purchase? It seems to happen to everyone at some point in their life when the Credit Gods just don't line up properly with their purchase plans. Luckily, it is 2016 and time to try the Credit Gods again with a refinancing loan option.
Some experts will tell you that refinancing is not worth the effort and that you will lose money in the end. They are right, but only if you do not refinance property. There are several steps that must be taken when refinancing:
First, figure out the credit score that was used for the original loan. Next, figure out your current credit score. A pair of useful websites are: credit.com and creditkarma.com. If your credit score has increased 50-100 points in the last 6-12 months it may be appropriate to refinance and secure a loan that is several points lower.
At this point it is appropriate to locate a bank, credit union, or other financial institution that will offer refinancing options. A loan can also be refinanced through the original lender. In addition to all of the national banks, such as Chase, Wells Fargo, Capital One, and Bank of America, there are a number of smaller, lesser known financial insititutions including: Autopay, Carfinance.com, Blue Harbor, Myautoloan.com, and Lightstream.
A few other things to consider are the remaining loan amount, age of the vehicle, and the number of miles on it. If the original loan involves a prepayment penalty this could also affect you. A prepayment penalty is when you pay off the loan early which is what your refinancing loan will do when the junior loan pays off the senior loan. One of the ways that refinancing will hurt you, or increase your total payment, is if you increase your loan time.
To demonstrate this, imagine the original loan was worth $20,000 for 72 months at 6.99%. The monthly payment is $340.88. At this rate and time the total amount paid will be $24,543.36. Assume that after 12 months it was refinanced to a rate of 3.50% for 60 months. The amount refinanced would be the remaining principal amount on the loan, $17,219.22.
The new monthly payment would be $313.24, a savings of $27.64 per month or $1,658.40 over the remaining 60 months. An example of where this may hurt the owner is if it were refinanced at 5.25% over an 84 month lease. At this rate the monthly payment would be $245.40, but when combined with the last 12 months of payments the total cost over 96 months is $24,704.16.
Some banks and institutions may charge a small fee to refinance the car. In addition to having a better credit score to get a better rate, a few other things that give preferable interest rates is a refinanced loan between 36-48 months above $10,000. Anything above the 48 month time period or below $10,000 will likely affect your interest rate by 0.25-0.50 percent.
Now it is your turn to crunch the numbers and see what could happen. https://www.chase.com/personal/auto-loans/auto-ref... is a useful website for calculating payments.
