We understand many people worry that refinancing a car loan puts them in a more restrictive situation. However, you can do everything with your car after refinancing that you could do with it before refinancing. There are no additional restrictions on your car because of refinancing.
In fact, smart refinancing can give you a lot more freedom with respect to your car. Whether you want to sell it, trade it in, or keep driving it, smart car loan refinancing can make life easier.
People often think of refinancing as if it’s the same as getting a second mortgage on your house. Refinancing a car doesn’t mean you are getting an additional loan on your car. When you refinance your car, you pay off the original loan and replace it with a new, hopefully better loan.
This means that from a legal standpoint, a refinanced car is the same as a car whose original loan hasn’t been paid off. In both situations, there is a lien on the car that you must resolve when trading in the car.
However, with refinancing, you might find yourself in a better situation when it comes time to trade in your car.
The goal of refinancing your car is usually to get a better interest rate so your car costs less and you can pay it off more easily. With lower monthly payments, you can make your payments every month on time, so you don’t fall behind. You may even be able to pay extra to generate equity in your car, which you can use when you trade the car in.
When refinancing, you can request a new loan with a shorter term that helps you pay off the car faster, which “bakes in” the equity increases, rather than counting on you to pay more than the recommended payment.
Or you could just put aside the money you save to help you with your down payment on a new car or dealing with “negative equity.”
Be careful about refinancing that encourages you to “cash out” the equity in your car. The money now might seem nice, but it could cause problems when it comes time to trade in.
After refinancing your car loan, you have a lien on it, the same as you did when your car had its initial loan. This means that the bank or other institution making the loan has a “hold” on the car, and you can’t sell it or trade it in without first resolving that hold by paying off the loan.
There are three situations you might find yourself in while trading in a car after refinancing:
Equity is the value of the car minus the amount you owe in principle on your car loan. If the car is worth more than the amount you owe on it, you have positive equity, and you can apply that value as part of your down payment on a new car.
If a dealership offers less than you owe on your car, you have negative equity that will have to be resolved before you can trade the car to the dealership. To make the best of a bad situation, hopefully you can pay off that negative equity right away. Paying off that negative equity hurts and takes away from your down payment on the new car, but it’s better than the alternative.
If you don’t have enough money to pay off the negative equity on your trade in, some dealers will turn you away. However, others will offer to roll over your negative equity into your new car loan. You’ll be able to get your new car, but the loan on that car will include the money you still owe on your old car. This will likely make your interest rate higher and will add even more negative equity to your new car. There might be times when this is helpful, but if you’re not smart, you might find yourself in a cycle of ever-expanding debt.
If you have a bad loan on your car, refinancing can help get you into a better situation, whether you love your car and want to keep it or are looking to trade it in. At iLending, our personal loan consultants take the time to learn your situation so they can match you with the right loan for you. They can help you find a loan that will give you the savings you need to save for a new car or aggressively pay down the principle to avoid negative equity.
People save an average of $145 a month when they refinance their car loan with iLending. You can use that money to save for your down payment or aggressively pay it back into your new loan to generate equity for trading your car in. Read our savings stories for more ideas about what you can do with your savings.
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