Refinance to Lower Monthly Payments

• You may refinance your existing car loan by taking out a new loan for the outstanding balance. Much like a home refinance, the new loan pays off the old loan. The length of the new car loan may be significantly beyond the original payoff date, thereby lowering your monthly payment. For example, if you took out a car loan at $50,000 for five years and paid $10,000 for a period of three years, you only have two years and $20,000 to go. If you refinance the $20,000 for another five years, you only need to pay $4,000 per year, thereby cutting down your yearly payment by $6,000. The downside of this process is the continued indebtedness on a depreciating asset.
  
  

Refinance to Change Lenders

• You probably know about the horror stories of consumers who have contracts with lenders that are not sympathetic to temporary financial problems. Some lenders offer deferments of a payment and allow for the outstanding payment to be tucked on to the end of the loan, however others do not. If you are in fiscal dire straits, working with an unwilling lender is a hassle and may damage your credit if you are simply unable to make your scheduled monthly payment once or twice. Refinancing with a different--more sympathetic--lender can offer you the flexibility you need to navigate uncertain financial times.
  
  

Refinance to Improve Credit Rating

• Seek out a new loan if your credit rating has drastically improved. Going back to the $50,000 example previously mentioned, if you took out this loan at an interest rate of 10% because of a less than stellar credit history, and if you have been paying on it for three years, you have $20,000 and two years to go. If your credit rating has improved and moves you from the "fair" to the "good" category, you will qualify for a car loan at a much better rate; you might be able to take off as much as two to four percentage point. If you refinance the remaining $20,000 for two years at 6%--instead of the 10% you have been paying thus far--you save $8,000. My FICO (a link is provided in the resources section) reports that on a 36 months car loan a FICO score of 600 leads to an APR of 15.236%, whereas a FICO score of 700 qualifies you for 8.091%.