financial planning

Should You Refinance Your Car: Insider Tips

Unsure whether or not you should refinance your car? See if low auto loan rates and lower monthly payments could be in your financial future. We break down what you need to know about refinancing and if it’s right for you.

should i refinance my car?

Refinancing your car loan can be a wise move, especially if you’re looking to lower your monthly payments, reduce your interest, or adjust the loan term to better fit your current financial situation. But is refinancing the right move for everyone? Here are our Credit Union insights and tips designed to help you decide when to refinance a car to drive you closer to that windows-down-on-an-open-road kind of feeling.

assessing fees + costs

The first thing to consider with refinancing auto loans is any associated costs. Look out for any prepayment penalties your current lender might charge, as well as registration, title, application fees, and fees you might be charged to make a payment with potential new lenders. If the fees outweigh the savings, refinancing may not be beneficial.

SunWest Tip: Title and processing fees for a refinance are pretty minimal (usually well under $100). However, if you’re making changes to your existing MVD registration (name change, ownership change, etc.) or refinancing an out-of-state vehicle, the fees may be a bit more. Don’t let that scare you off! Ask your new lender for the fees before you close on your loan, and compare them to your potential savings. 

checking your credit score

Unless there’s a specific promotion offering a rate discount, your credit score is going to be a pivotal factor in determining the interest rate you’ll get on your refinance loan. If your credit score has improved since you first took out your car loan, you might qualify for significantly lower rates, which could translate into substantial savings over the life of the loan. 

SunWest Tip: Don’t hesitate to ask about promotions or special discounts on interest rates. The worst you’ll hear is ‘no’, but even a small discount is better than none. Also, as a member of SunWest, you can keep track of your credit on Credit Sense through your MySunWest app.

understanding your loan term 

If you’re nearing the end of your current loan term, extending the duration through refinancing may not be your best option. While a lower monthly payment is as enticing as ice cream in July, the total interest paid over the extended period could cost you substantially more–like, you could have bought an industrial ice cream maker with all that extra interest you paid.   

SunWest Tip: Crunch the numbers! Use this auto loan refinance calculator to compare the total interest you’ll pay if you stick with your current loan versus the potential new auto loan.

analyzing vehicle value + equity

Understanding the current value of your vehicle is another vital factor to consider. If you have negative equity–where you owe more than the vehicle is worth–refinancing might be challenging. Lenders assess risk using the loan-to-value ratio. If you owe more than the vehicle is worth, this will increase your ‘risk’ and, if it’s a substantial amount, decrease your chances of getting approved for a refinance or lead to a higher interest rate.

SunWest Tip: What is typically considered a ‘substantial amount’ of negative equity? Owing 20% more than your car is currently worth. For example, your car is worth $25,000 and you owe $31,250. 

final tips for auto loan refinancing

1. Shop Around:

Don’t settle for the first offer. Compare interest rates from various lenders to ensure you’re getting the best deal. 

2. Timing Matters:

The best time to refinance a car loan is when interest rates drop, when your financial situation and credit score have improved, or if a lender is offering a really good deal. 

3. Read the Fine Print:

Be meticulous about understanding all terms and conditions of your new loan agreement.

Refinancing your car loan can be a savvy financial decision under the right circumstances. By carefully considering your current financial status, the terms of your existing loan, and the potential benefits of a new loan, you can make your most informed decision.

When done the right way, auto refinancing can breathe new life into your financial plan, easing the stress and getting you closer to a feeling of freedom that comes with paying off your car loan. Remember, the best decisions are those that consider both immediate benefits and long-term impacts.

Apply today to refinance your auto loan with SunWest + embrace financial freedom!

May 2, 2024

Published by SunWest Credit Union

published by