Is It the Right Time to Refinance Your Auto Loan?
You can improve your financial health in two ways, reducing expenses and increasing income. Sometimes, the first option is more practical than the...
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By: WEOKIE Federal Credit Union on Oct 28, 2019
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!
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.
There are two main benefits to refinancing an 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.
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.
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.
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.
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.
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.
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
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In a recent blog post, we talked about the basics of refinancing your auto loan. Here is a quick overview of some of the takeaways from that post: