What is Car Refinancing? Definition, tips, and advice

During these tough economic times, you will see advertisements promoting refinancing-- refinance your auto loan, save money; refinance your mortgage, save money. And every time you hear it, you are probably thinking, "save money, how? What is refinancing exactly?"

Let's break it down.

Refinancing an auto loan means:

1. Applying for a refinancing loan through a company that offers this type of loan,
2. Getting approved by a new lender,
3. A new lender will pay off the remaining auto loan debt,
4. The new lender then issues you a new auto loan with different regulations than the original auto loan-- from change in interest rate, term, and/or monthly payment.

Many people refinance to save money. Generally, with a new auto loan condition, the lender will extend the term therefore decreasing the monthly payments.

Also, if your credit score has significantly improved or the market has drastically changed since you signed into the first loan, you may be entitled to a lower interest rate. Realistically, this does not happen as frequently as most hope. The reason?

When lenders extend the term, they increase the interest rate. This is just for a precaution. Over time, a car will depreciate at a faster rate than most can pay off. The longer the term, the more likely the car may stop working, need a large repair, or make you antsy to purchase a new one. In any of those cases, there is a greater chance the lender will lose money on refinancing your auto loan. Therefore, the interest rate may increase to encourage you to pay it off faster.

Tip: Look for a refinancing loan that does not charge you pre-payment fees-- that way you can pay it off much quicker, which saves money on the interest and your monthly payment is already lowered.

In the short-term, refinancing can save a couple of hundred dollars a month on a car loan. For those struggling, it may be worth it to look into, at least.

Over the long-haul, you may not be saving as much as you hoped. Interest accumulates everyday that you do not pay back your auto loan in full. Therefore, when refinancing extends the loan term (amount of time you are granted to pay back the loan) that means you will be charged more interest over time. Interest can definitely add up, but now you have more time to scrounge up the money.

According to the experts at CarFinance.com, most individuals refinance during the Holiday Season. Refinancing is such a simple process (generally three to five minutes to complete an online form, maybe faster for all you quick Hubpage typers!), and takes some time for the new lender to move the original loan over into their possession. That generally means individuals get to skip a month of payment.

Now, when we say skip, we don't mean for forever. You have to pay the loan off, unless you want your car repossessed, but when the Holiday season is taking a burden on your wallet, refinancing is a great option.

Personally, I'm surprised my boyfriend has not refinanced-- my bday, Christmas, and our anniversary all within the same month. Poor kid.

Hope this informs many on the subject of car refinancing!