When Refinancing Your Car Loan Might Make Sense
You’ve probably heard of refinancing your mortgage and we just covered refinancing student loans earlier this month, but when is the last time you looked into refinancing your car loan?
There are a few reasons why refinancing your car loan may be a good idea.
It could lower your interest rate, save you money, and change your loan term to fit your current needs. Here are some examples when you might want to consider refinancing your car loan:
When interest rates have lowered.
Interest rates for any loan can change over time. In the case of most loans, rates are largely influenced by the Federal Reserve. Throughout the year, the Federal Reserve may change the interest rate lower for car loans since when you first purchased your vehicle. Keep an eye out for what car loan interest rates are if you’re considering refinancing.
You have a better credit score.
You’ve been making on time payments, built credit history, and/or used a credit card to improve your creditworthiness—that’s great! There are many ways to improve your credit score, and if you’ve worked hard since applying for your car loan this may be a good time to talk to a financial institution you trust about your refinancing options.
Fun fact: Your credit score can place you within ‘Prime Categories’ that help indicate what your interest rate should be:
Super prime: 781 - 850
Prime: 661 – 780
Nonprime: 601 – 660
Subprime: 501- 600
Source: Experian
Not sure what your credit score is? You can receive one free credit report every year from annualcreditreport.com.
You’d like a different loan term.
You may find yourself ready to pay off the loan a little faster, and want a better interest rate so you’re paying more towards the principle of the loan rather than interest. Refinancing may give you the ability to shorter the overall loan term and get you on the fast track to paying off your car loan quicker.
You need smaller monthly payments.
Ever hear the phrase, “Life is made of hills and valleys”? There are a variety of situations that could happen to change your monthly spending plan: maybe you lost a source of income, experienced unexpected medical bills, or just need to make more funds available to you. Refinancing can alleviate some financial stress, just keep in mind that you may be extending the loan term.
You’re ready to change car loan providers.
If you originally took out a car loan through the dealership, chances are you may be paying a higher interest rate. Moving your car loan to your financial institution could result in a lower interest rate and an easier way to make payments. Not to brag, but credit unions have doubled in car loans over the past year.
*It could be because of our competitive rates, or our excellent member service—we’ll let you be the judge of that.
Refinancing your car loan might not make sense if:
-You’re really close to paying off your vehicle. Most car loan providers don’t love the idea of refinancing a car loan if you’re close to paying it off. And as we know, cars are one purchase that depreciate (goes down) in value “the second you drive it off the lot”. The best thing you can do is check the value of your car versus how much you owe on it through a trusted source before considering refinancing.
-Your car is older or has high-mileage. Once again, we see the word “depreciate” come into play. The older a car gets or the more mileage it accumulates, the more it depreciates in value—the more challenging it may be for a car loan provider to consider taking on the car for refinancing.
-Your current car loan provider has a prepayment penalty. Some car loan providers may have prepayment penalties included in the loan agreement. Providers who include this penalty is due to the money they would have lost on long-term interest. Not every state has a prepayment penalty, search your state’s auto loan policies prior to considering refinancing.
In a nutshell:
Car loan refinancing can really benefit you in the long-run, especially if you’re looking to save money and pay a lower interest rate. Before you consider switching car loan providers, research the value of your vehicle and see if your state has car loan prepayment penalties.
The credit union has your back.
Let the credit union help you make the switch. We’ll walk you through the process and be here to answer any questions.
Interested in becoming a member of the credit union?
Becoming a member of the credit union means better rates, lower fees and a wide range of products to fit your everyday financial needs (and the no-so-everyday ones, like home loans).
