Applicants often ask how refinancing works. One applicant was interested in financing her car and was wondering if it would reduce her car payment in total or just the monthly payments, which would extend the loan term. The customer further explained her car payments per month were $457 and she had 48 months remaining on the loan.
There are many reasons to refinance, but the primary two reasons are to lower your payment or to reduce your interest rate. I have spoken with people that had to refinance a loan because they experienced an economic down turn. With the down turn they could no longer afford their current debt load and got behind on some of their bills, as a result their credit score was lowered. They refinanced their loan at a higher rate and a longer term, but they met their primary objective of lowering thier payment so they could meet their other obligations.
On the other end of the scale are folks bouncing back from an economic down turn. Their current loan is at a higher rate becuase they had a lower credit score at some point in the past when they financed the car. Often these people refinance at a much lower rate with a much shorter term, so they can pay off their loan quicker.
If you do not qualify for a better interest rate or you do not need to lower you monthly payment you should not refinance. If you qualify for the same rate that you have now and you want to pay off your loan early, simply increase the payment that you send in each month. Most lenders now days use simple interest contracts so any additional payment is applied to the principal.
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