Should I Refinance My Auto Loan?

on Jan 30 in Financing tagged Financing by Jason

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

1) You can get a better interest rate. If you can get a rate at least 1 percent better (and preferably 3 or 4 percent better), go ahead and refinance your auto loan. You won’t get much benefit from anything smaller than 1 percent. Mentally it may seem like 5.99% is better than 6.25%, but the reality is that they’re so close it’s not even worth 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.

However, if you’re thinking about getting equity out of your car so you can get money to pay other bills, you should know that this is NOT a good reason to refinance. Cars do not have equity since they are depreciating assets, and each day they are worth less than the day before.

Banks sometimes offer “car equity loans,” but don’t get sucked it. Even if your car is worth more than you owe right now, that won’t last long. Borrowing against any equity you have today is always a mistake - all you’re doing is stealing from your own future by adding more payments to your current loan. Would you rather make an extra two years of payments on your car so that you can have an extra $100 today? Probably not.

Unless you’re at risk of defaulting on a major asset, don’t refinance. If you refinance for extra cash, you’ll regret it in two or three years when your car should have been paid off and you’re still making payments.

If you do need to refinance, keep the following 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.

• Don’t add more time to your loan. Unless you’re desperate to lower your payment, try to get a loan that ends at the exact same time your original loan would have. For example, if you buy a car using a five-year loan, and in a couple of years you decide to refinance it, don’t take out another five-year loan. All you’d have done is extend the amount of time that you’ll be paying for your car.

• Check with your credit union. Credit unions have great rates, they want to help you, and they’re willing to work with you more than a regular bank will, especially if you’re in a situation where you’re at risk of defaulting.

Of course, instead of refinancing your car, you can try and trade it in for a less expensive vehicle. Take a look at our tips on negative equity or being upside down, and make sure to figure out your car payment budget before try and trade-in your car.