How Does Refinancing a Car Work?



You might be new at this. If you’ve recently asked yourself, “How does refinancing a car work?” it may be a good idea to do a little research to get the concepts down.*

The easy answer to the question of how refinancing a car works is that you take out a second auto loan to replace the financing that you did with your first loan. You borrow from Peter to pay Paul.

The new loan comes with different terms than the original one and, typically, refinancing takes place when a qualified applicant is seeking better terms that will save them money. Auto refinancing can occur in many different ways, depending on the goals of the individual customer. Here are three potential advantages of refinancing your auto loan:

1. Lower monthly payments

Refinancing may lower the monthly car payment. This might be by reducing the interest rate or extending the duration of the loan term, or it could be both of these together.

2. Lower interest rates

When a refinanced car loan comes with a lower interest rate than the current loan, it may reduce the total amount of interest paid by the time the loan amount is paid off, in cases where the loan term is not extended, or extended by much.

3. Changing the loan term duration

Extending the length of the loan term means the loan amount will be paid back to the lender over a longer period of time, reducing the monthly payment needed to meet that sum. However, it might mean you end up paying more for your car in total, including the interest charges, by the end of the loan term.

A loan may also be refinanced to shorten the length of the term, such as when a borrower is seeking to pay off the note more quickly and reduce the amount of interest paid. Depending on the interest rate, a shortened loan term may raise the monthly payment, but reduce the amount paid for the car in total.

Transaction fees

Bear in mind that refinancing a car may involve transaction fees, charged by the lender, to be paid up front or rolled into the loan amount on which you will pay interest. This will form the annual percentage rate (APR) of the refinanced loan.

Using an auto refinance calculator

An auto refinance calculator can be used to estimate what refinancing a car may mean for your situation, and what you might save. It enables you to enter the loan balance, monthly payment and APR of your current loan, and compare it to the refinanced amount, loan term and APR of a potential new loan, to estimate how monthly car payments and total interest payments will change.

Searching for lenders

When is comes to auto financing in general, the Federal Trade Commission recommends shopping around for the best deal. When you apply for refinancing, you’ll typically have to provide the lender with some personal information in order to find out if you qualify, and, if you do, what kind of rate they might offer. You can read more about that in our article “How do I refinance my car?

Refinancing a car loan with bad credit†

At RoadLoans, we accept refinance applications from consumers with a broad range of credit profiles, including those looking to refinance a car loan with bad credit. We don’t, however, accept applications to refinance a loan from existing Santander Auto Finance and Chrysler Capital customers. As an online, direct lender, the RoadLoans application is quick and easy, and, if you qualify, the process is straightforward.

It’s very common for people who are new to the whole financing business to ask, “How does refinancing work?” Understanding the process may help you find an auto loan with better terms for your situation.

Apply for auto refinancing with RoadLoans to see if you can lower your rate and start saving.


* These statements are merely informational suggestions only and should not be construed as legal, accounting or professional advice, nor are they intended as a substitute for legal or professional guidance.

RoadLoans is not a credit counseling service and makes no representations about the responsible use of or restoration of consumer credit.

† “Bad” or “Poor” credit generally is considered a FICO score around 600 and below by sources including the Consumer Federation of America and National Credit Reporting Association (reported by the Associated Press),,, Investopedia, and others. The Congressional Budget Office identifies a FICO score of 620 as the “cutoff” for prime loans. FICO scores are not the sole factor in lending decisions by and Santander Consumer USA.




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