When You Should Refinance a Car and When You Shouldn't
Many people are experiencing cash flow problems in the current climate, and your auto payment may be one of your biggest monthly expenses. It's no surprise, then, that you might be considering if and when to refinance your car loan. But where to start?
Refinancing your car can be an uncertain situation for a lot of people – and it's hard to know the right time or the best way to go about it. Here we will go over a few important factors to consider before you refinance your car.
Most people choose to refinance their car to free up some extra cash for other expenses. With that in mind, the goal of refinancing should be securing a lower monthly payment.
But here's the catch: depending on your refinancing plan, a lower monthly payment might actually require you to pay more over time.
How Do I Know When To Refinance My Car?
If you qualify for a lower interest rate and the conditions of the offer are favorable to you, there's no strong argument against it.
Here are a few situations in which you should seriously consider refinancing:
- Your credit score has gone up since you first bought your car. If this is the case, you might be eligible for a better interest rate – and more money in your pocket.
- You're not in love with your current lender and/or loan conditions. Whether it's unreasonable terms, poor customer service, or needless bureaucracy, you want out.
- You want to change the length of your loan. Shorter loans will charge more per month, but you'll pay less in interest over time – and vice-versa for longer loans.
- There's been a change in your income. If you're not sure whether you'll get a better rate but need to lower your monthly expenses temporarily, refinancing may still be the right option for you. Plenty of people do so when finances are tricky and they need some breathing room to get back on top of things.
When Should I Avoid Refinancing My Car?
While refinancing may be the right option for some people, it isn't for everyone. If you're one of the following situations, you should consider whether to wait a while before refinancing your car.
Your car is old
Unfortunately, many lenders have strict rules about refinancing cars over a certain age. Each vendor will have additional rules and restrictions which you should be aware of before you refinance your car.
Your car is new
On the other hand, it can also be risky to refinance too soon after buying a car. Cars quickly depreciate once they go from new to "used" – even if you've only used it for as little as one or two months. This means that you might owe more than the car as technically worth – which is seldom a good position to be in when considering refinancing.
Your loan terms include a prepayment penalty
Refinancing means you'll be paying off your current loan. Unfortunately, some vendors have prepayment penalty clauses which charge you for doing this. Be sure to do the math and make sure you'll still save money by refinancing after accounting for prepayment penalty fees and other expenses.
You might owe more than your car is actually worth – and if that's a case, you probably don't want to refinance till things improve. Vendors find these situations much riskier from their point of view, so the terms and conditions will likely be pretty unfavorable to you. Some people refinance other expenses, such as personal or home loans, to cover this difference.
None of these situations necessarily mean you shouldn't refinance your vehicle, but they are certainly things you should be aware of when making your decision.
I Think Refinancing Is Right For Me. How Do I Get Started?
You've weighed your options, done the math, spoken to a professional or two, and you think it's time to refinance your car. But where to begin?
First, you'll need to get your documents in order. Get the most recent statement from your current lender in addition to all the details about your car: it's VIN, make, model and year of production will all come in handy.
Secondly, you'll need some proof of your ability to repay the loan. Usually, this will be in the form of recent paystubs, but different lenders have different requirements, so be sure to check those out beforehand.
Finally, you'll submit your application and answer follow-up questions to move the process forward.
Where Do I Go To Refinance My Car?
You should browse online for the institutions with the best rates and highest customer satisfaction. Credit unions, local or national banks, and online lenders are all options. Credit unions tend to offer low-interest rates and flexible repayment plans.
In the end, there is no one perfect solution in car refinancing. You must take the time to consider your own needs and the available options.