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(ARA) - You have probably heard of auto refinance before. Or simply refinance. The term actually refers to a financial situation wherein a borrower finds financing to pay off a current loan.
For years now, people have refinanced their homes and saved thousands of dollars. However, the practice of refinancing car loans has yet to be indulged by most. Why? Perhaps the reason is that auto loans generally behave differently from home loans and people are naturally skeptical about new methods. Regardless, auto refinance is still a good choice, provided that the situation is right.
The only way for auto refinance to work is if you get it when the interest rates are low. Low rates typically mean low monthly repayments and this is the situation you should aim for.
Only few people really understand the time value of money. Keep in mind that the longer you pay for a loan, the bigger amount of money you actually spend for it. Thus, by the end of the loan period, you would have paid more money on interest than on the principal. This is why auto refinancing is important because it is one of the few methods that could help you minimize loan costs and maximize your savings.
Almost anyone with a loan to his name can benefit from auto refinancing. Even car buyers with bad credit can obtain auto refinance as a way for them to lower down their APRs.
Let's say, for instance, you make an auto refinance loan for $16,500 on a new Honda Accord. At the end of six months, you agree to pay off the amount at 21 percent APR. So for a few months, this will be your monthly loan obligation.
Then, you decide to take an auto refinance loan. However, this time, your loan rate is at 6 percent APR. Your current monthly payment is $446 which gives you total interest charges of $10,283 at the end of your loan period. Your auto refinance loan offers you a monthly payment of $319 with total interest charges of $2,639. Thus, by refinancing, you can save up to $7,600.
Just as a homeowner can cash in the equity in their home, so can a car owner provided that they have sufficient enough equity. Most consumers who actually decide to finance their cars rather than lease pay very little on a down payment and no more than their monthly minimums throughout the life of the loan -- or until they sell.
In a the situation of a trade-in, however, a consumer might only owe $10,000 on a $20,000 car, giving them $10,000 in equity. Most lenders will allow a consumer in this situation to pull out up to 100 percent of the value of their car, giving the consumer the option to get a check for $10,000 to be used in any way they like.
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