At Addition Financial, we pride ourselves on helping our members make smart financial decisions. We’re here to answer questions and make suggestions. One question we hear a lot is this:
"Should I refinance my car loan?"
It’s an important question to ask because while refinancing a loan can be a great idea, it can also be a financial mistake if you do it at the wrong time – or for the wrong reasons. With that in mind, here are five situations when it makes sense to refinance your car loan.
#1: Your Financial Situation Has Improved
The first situation when it might make sense to refinance your car is if your personal financial situation has improved since you bought your car. That might mean any of the following things:
- You have received a raise or found a better job that gives you more money in your monthly budget.
- Your expenses have significantly decreased, and you want to pay off your loan more quickly.
- Your credit score has improved significantly.
Any one of these events might offer the opportunity to refinance. If you have more money, whether it’s the result of increasing your income or decreasing your expenses, you might want to consider a shorter loan term to pay off your car more quickly – and an improved credit score can help you qualify for a better interest rate than the one you have now.
#2: Interest Rates Have Dropped
If interest rates have significantly dropped since you took out your existing loan, you might want to consider refinancing. Interest rates are affected by the performance of the economy. If rates have gone down, there’s no point in continuing to pay a higher rate than necessary if you can qualify for something better.
You can get a general idea of current interest rates are by doing an online search. You won’t know exactly what rate you’ll get unless you complete an application, but you can get an idea of the range of rates that are currently available. If the range is lower than what you’re paying now, then it may be worth refinancing your car loan.
#3: You Want to Decrease Your Monthly Payment
Sometimes, refinancing a car loan makes sense because you have reviewed your monthly expenses and you want to find ways to save money. Making car payments can be a financial burden and refinancing may afford you a way to reduce your payment without increasing the total amount you pay for your vehicle.
There are two basic ways to decrease your payment and it’s important to be mindful of what they mean. The first is by qualifying for a lower interest rate. If you can do that, your payment may be lower which will free up some of your monthly income for other expenses.
The second is by extending the term of your loan. It’s important to know that going for a longer loan term than what you currently have can mean you pay more in total interest than you would otherwise. In some circumstances, it may even put you upside-down on your car, meaning you will owe more on the car than it's worth.
#4: Your Current Loan is a Dealer Loan
There’s no denying that dealer loans are convenient. If you can get a loan from a car dealer, it amounts to a “one-stop shopping” experience. It’s quick and easy – but it can also cost you money in the long run.
Car dealers want you to apply for loans with them because they make more money on the sale if they also provide the financing. We can’t blame them for that, but at the same time, as a consumer it’s in your best interest to get the lowest rate possible. Sometimes, dealership rates are high, and you might be able to save money by getting a loan directly through a lender.
#5: Your Current Loan is a Bank Loan
Banks are in business to make a profit. When they make loans, they do it with an eye toward pleasing their stockholders. In some cases, that might translate to a higher interest rate than you would pay if you went elsewhere.
By contrast, credit unions tend to offer lower interest rates than banks. That’s because credit unions are owned by their members. Any profits are passed on to the members in the form of low interest rates and fees. That means if your current loan is with a bank, you might be able to save money by refinancing it with a credit union like Addition Financial.
If you’re wondering, “Should I refinance my car loan?” then the five situations we’ve outlined here can help you make the best decision for your circumstances.
To learn about Addition Financial’s competitive auto loan refinancing options, click here.
Posted on Sep 27, 2018
Topics:
