It can be difficult to find reliable information out there about refinancing an auto loan. There is plenty of advice to be found on refinancing mortgages and student-loan debt, or even consolidating credit-card debt, but auto loans tend to get left out of the conversation.
Let’s fix that. This post is all about refinancing your auto loans!
What is refinancing?
When you refinance a loan, you are taking out a new loan, which pays off the balance of the original loan. In other words, the new loan is replacing the old loan.
This can be done through a credit union like WEOKIE, as well as many banks, car loan companies and other creditors.
What are the benefits to refinancing?
There are two main benefits to refinancing an auto loan.
- If interest rates have gone down or if your credit has improved a lot, you may be able to get a lower interest rate by refinancing. That would save you money over the life of the loan.
- If you need to reduce your monthly out-of-pocket expenses, refinancing may allow you to reduce the amount of your monthly payments, because the loan will be for a smaller principal and because you can add more time to the repayment period. However, if this isn’t paired with a lower interest rate, this will probably end up costing you more in interest over time.
Should you refinance your auto loan?
This is not an easy question to answer. In some situations, refinancing an auto loan makes a lot of sense. But for many people, it may end up being an economically sound decision to simply continue paying down their existing car debt.
Good reasons to refinance a car loan
- Your financial situation has improved since you originally took out the loan.
A lower debt-to-income ratio means a better credit score, and a better credit score means a lower interest rate. If you have paid off a lot of debt or have increased your income significantly since you got your car loan, it may be a good time to refinance for that lower interest rate.
- You are struggling financially and need to have more cash available every month.
Many people choose to refinance because they need to increase their cash flow. This is the situation we mentioned earlier, in which you may end up paying more interest over the life of the new loan, but you will be able to reduce your monthly payments.
Good reasons to skip refinancing and just keep paying off your existing loan
- You don’t have much left on the loan.
If the loan is nearly paid off anyway, it definitely doesn’t make sense to refinance, even if your interest rate would drop or you could pay less money for the last few months of the loan. If you are within 12 months of paying off your car loan, we generally don’t recommend refinancing most of the time.
- Your car has depreciated too much.
Cars lose value quickly. If your new loan would require you to pay more than the current trade-in or resale value of your car, financing is not a great choice.
- You have applied for several other loans in the last two years.
Too many loan applications can hurt your credit score. If your credit score is going to be significantly affected by another loan (or even just a hard credit check), we don’t recommend refinancing. It may not be worth the hit to your credit.
What are your other options?
Come talk to us if you are interested in discussing other options to reduce the interest rates you are paying on your debts or if you want to increase your available cash flow.
If you are thinking about financing your next major purchase, whether that is a car, home or some other major decision, don’t miss our new guide, “How To Make Room in Your Budget for an Auto or Mortgage Payment.”
*See a WEOKIE rep for details. Federally Insured by NCUA