Car Loans: When to Refinance

Filed Under Vehicles |

by Jason Lancaster

When it comes to refinancing your car, it’s important to realize that there are really only three good reasons to do so:

1) A better interest rate is a very good reason to refinance your auto loan. You should refinance if your new interest rate will be at least 1% less and especially if you will be getting an interest rate that is 3-4% less than your current interest rate. If refinancing will only get you a new interest rate that is less than 1% better, you shouldn’t waste your time. It probably seems like going from 6.25% to 5.99% is a big difference, but it is less than 1%. Since the difference is smaller than 1%, the benefit you will get from refinancing is so small that you shouldn’t even waste your time.

2) You’re at risk of defaulting on your car loan because you can’t afford to make the payments. If you’re one or two months away from repossession, by all means refinance your car.

3) If you’re at risk of defaulting on your home loan because you can’t afford to make mortgage payments unless you can lower your car payments.

You should NOT refinance if your reason for doing so is to get equity out of your car to pay other bills. Since cars are depreciating assets, they do not have any equity. This means that every day they will be worth less than the day before.

Although some banks may offer “car equity loans,” don’t fall for it. Your car may be worth more than what you owe, but this never lasts very long. It would be a mistake to borrow against this equity. You will add more payments to your current auto loan. Consider the future. Making an additional two years worth of payments on your car could not be worth the $100 you would get today from this kind of loan.

Only refinance if you are at risk of defaulting on a major asset. You will regret it in a couple years if you refinance for some extra cash when you could have been done making payments on your car if you hadn’t.

If refinancing is necessary, be sure to keep in mind:

Don’t pay any fees unless they’re minor (such as the $20 your bank may charge for a new title or lien). Walk away from “refinancing fees” and “loan origination fees,” and other charges along that line. The bank should be happy for your business and shouldn’t charge you for it.

If you are going to refinance, do not add any more time to your car loan unless you are really desperate to lower your payments. For example, let’s say that you took out a five year loan when you bought your car three years ago, so you only have two years left of payments. When you refinance, you shouldn’t take out another five-year loan because now you will be making payments for another five years when you would have been done in two. All refinancing has accomplished is extending how much time you will be making payments on your car. When you refinance, get a loan that will end at the same time your original loan would have ended.

Be sure to consult with your credit union when refinancing. Their rates are excellent, and they really want to help you. Credit unions are more willing to work with a customer than a regular bank is, particularly when there is risk of defaulting.

About the Author:

Author Jason Lancaster, a car industry veteran, developed AccurateAutoAdvice.com. You’ll find accurate advice on refinancing an auto loan and when to refinance your car.