When people think of refinancing, they often think of fees, appraisals and drawn out paperwork. While this is often true of a home refinance, it's not the case when a car owner refinances their auto loan. With these types of loans there are usually little or no fees involved, and the paperwork can often be taken care of in a matter of hours. Also, because car loans are made against a book value, there is no need for an appraisal. While it may not be for everybody, there are times when refinancing a car loan makes a lot of sense.

The first thing to look at on your car loan is the interest rate. Perhaps you did not get a great deal when you bought your car, or maybe interest rates have come down since you picked it up. Another reason that you may qualify for a lower interest rate is if your credit situation is improved. The thing to remember is that providing nothing adverse happens, your credit score will improve over time. Just having more history at an address or on a job gradually builds up a credit rating. No matter what the situation, if you can lower your interest rate it makes sense to refinance your loan. When you do this you will have two options. The first is to keep making the same payment, in which case you would pay the car off sooner. The other option is to keep the length of the loan the same, which will give you a lower payment.

In addition to lowering an interest rate, an auto loan refinance can also dramatically lower payments by stretching the loan out over a longer term. Although the risk is that you could end up spending more in the long run. For some people car payments can become a burden, others just want to free up some cash each month. A $25,000 car loan over five years with a six percent interest rate has a monthly payment of $483. If that were to be refinanced with a new five year loan half way through, the payment would go down to $211. That's a savings each month of $272 using the same six percent rate. If the interest rate were lower, the savings would be even greater.

Another time that auto loan refinancing might be a consideration is at the end of a car lease. Usually a lease has a purchase option included, and to buy the car a lump sum payment has to be made at the lease conclusion. A car loan works well for people who don't want to write a big check, and would rather spread that buy-back figure out over a few years.