Car Loans: When to Refinance
There are only three reasons why you should refinance you car:
1) The first reason you should refinance your car is if you can get an interest rate that is at least 1% better than what you currently have. Although 5.99% is better than 6.25%, they are so close (less than 1%) that the difference is not enough for you to waste your time. However, if you are able to get an interest rate that is at least 1% better, you should seriously consider refinancing. If refinancing will get you an interest rate that it 3-4% better, you should definitely refinance your car loan.
2) You’re at risk of defaulting on your car loan because you can’t afford to make the payments. If you’re one or two months away from repossession, by all means refinance your car.
3) If you’re at risk of defaulting on your home loan because you can’t afford to make mortgage payments unless you can lower your car payments.
However, if you’re thinking about getting equity out of your car so you can get money to pay other bills, you should know that this is NOT a good reason to refinance. Cars do not have equity since they are depreciating assets, and each day they are worth less than the day before.
If you owe less on your car than it is worth, you shouldn’t borrow against this equity since it won’t last very long. “Car equity loans” are offered by some banks but are never a good idea. Think about it this way. Would it be worth it to get a $100 today if that means you would have to make two years of extra payments on your car?
Unless you’re at risk of defaulting on a major asset, don’t refinance. If you refinance for extra cash, you’ll regret it in two or three years when your car should have been paid off and you’re still making payments.
If you decide that you should refinance, follow this advice:
Walk away if a bank is going to charge you large fees such as “loan origination fees” or “refinancing fees.” Only pay small fees like $20 for a new title or lien. The bank should not charge you for your business.
Don’t add more time to your loan. Unless you’re desperate to lower your payment, try to get a loan that ends at the exact same time your original loan would have. For example, if you buy a car using a five-year loan, and in a couple of years you decide to refinance it, don’t take out another five-year loan. All you’d have done is extend the amount of time that you’ll be paying for your car.
Always check with your credit union. Not only do credit unions want to help you, they usually have excellent rates. They will work with you more than a regular bank will, especially if you are in a situation where you may default on your loan.
