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How Does Refinancing a Car Work? A Concise Guide to How, When and Why


If you’re like many Americans, you may feel a bit pressed for cash towards the end of each month. It seems like there’s never enough money to go around. And it doesn’t help that you have hefty car payments, rent, and other bills.

You’re not alone. Did you know 78 percent of American workers are living paycheck to paycheck? However, just because financial stress is common, it doesn’t mean you’re destined to live with it forever.

What if there was a way to alleviate some of this financial strain by refinancing your car?

But how does refinancing a car work? When should you do it? And are there reasons why you shouldn’t refinance?

Keep reading our car refinancing guide for the answers.

How Does Refinancing a Car Work?

Refinancing a car means implementing discipline. For example, the better your credit score is, the better the rate you’ll receive for your new car loan. However, this can take time, and in most cases, requires sacrifice.

However, you can learn how to boost your credit score later. Right now, let’s talk about how to refinance your car.

How to Refinance a Car

To refinance your car, you essentially need to reapply for the loan. You can do this with the same lender who currently holds the loan or seek financing from other agencies. We recommend shopping around for the best rates.

However, the answer to “How does refinancing a car work?” may depend on your situation. For example, you won’t be able to refinance a car if it’s estimated value is lower than the requested loan amount. This can be due to damages or depreciation. 

You can also fail to be approved if you have a poor credit score, a history of missed payments on the original loan, or a high debt-to-income ratio. 

When and Why to Refinance a Car

Let’s talk about the right time to refinance a car loan. There are several situations that indicate a good time or reason to refinance, for example:

  • If interest rates are substantially lower 
  • If your financial situation has improved (you could obtain a loan with much more attractive rates)
  • If you got a less-than-favorable deal on the original loan
  • If your car payments are high and causing financial strain
  • If you want a new loan under your primary bank

Keep in mind, if you’re wondering “How does refinancing a car work?” in terms of qualifying, most lenders will want to see at least six months or more of car payments on the original loan before they’ll approve you for a refinance. They want to make sure you’re responsible when it comes to paying bills. 

Bad Reasons to Refinance a Car

Finally, you need to recognize when refinancing a car is a bad idea. Here are some of the top reasons why you shouldn’t refinance:

  • The car loan is nearing its end
  • Your credit is worse than when you took out the original loan
  • You owe more on the car than it’s estimated value
  • The original loan carries early payoff fees or penalties
  • You plan on applying for a home loan in the near future

Looking for More Great Advice?

We hope we provided adequate answers for “How does refinancing a car work?” If you can use our advice to get approved for a refinance, it could significantly improve your loan rates, lower your monthly payments, and save you tons of money in the long run.

However, if you still have other questions about finances, love & relationships, or health and wellness, be sure to check out some of our other articles before you go. Good luck!