Car Loan Refinancing - Did You Know You Can Refinance Your Car Like a House?

5 MIN. READ

You've paid your monthly car loan on time, and your credit is good. There must be some reward for your hard work and responsibility, right? We often think of refinancing in terms of mortgages, but the process works just the same for auto loans. Your loan isn't set in stone, and financial institutions like credit unions are often happy to replace existing terms with something more fitting for your unique situation. Car loan refinancing can be an excellent tool to make sure you get favorable terms and save thousands in interest over the life of your loan.

Let’s learn more about the best time to refinance, what the benefits are and what steps you can take to start the process.

When should I refinance my car?
The right time to refinance your car can be different for everyone, and it depends on factors such as the market interest rates, repayment terms and even the value of your car.

Typically, you want to refinance your car loan when:

• You financed your auto loan through a dealership. It seems logical to finance your vehicle at the dealership since this is where you negotiated a price. However, this is one case where one-stop shopping could end up costing you serious money. Dealerships are incentivized to have you buy a car on terms that are best for their business, not your wallet. In other words, you want the best financing option available. But the dealership wants to make a commission on your loan, which they do if they act as a broker. These are competing goals, whereas going straight to a financial institution cuts out the middleman and helps you find a financing option that is really in your best interest.
• Interest rates are low. Interest rates have been at historic lows for quite some time now. If you take a look at your auto loan terms, you might see current market rates are lower than what you initially received. In this case, you can take advantage of car loan refinancing and get a much better rate. If you do, you will save a lot on interest charges. Financial institutions like credit unions are known for offering lower interest rates and often provide auto loan refinance promotions.
• You want to change existing terms. Refinancing your car loan is another way to change the repayment term. For instance, you can extend the repayment term and get a lower monthly payment, but you might pay more interest. Conversely, you can reduce the existing term to finish paying the loan faster, but keep in mind that your monthly payments might be higher.

Additionally, remember that, under normal circumstances, a car's value immediately drops as soon as you drive it off the lot. However, if you've researched car prices recently, you probably know that auto sales have skyrocketed to an all-time high. In other words, today's car values are greatly inflated.

If the value of your car is higher than your current loan balance, this might also be a perfect time to refinance your car. If you don't already know the value of your car, you can search it through services like Kelley Blue Book.

Benefits of refinancing – When to opt for or against it
A benefit to refinancing your car loan is that you can shop for better rates and terms. If you are not satisfied with your current lender, rates and terms, it is a great opportunity to search for a new financial institution that offers better incentives. If your credit and financial situation have improved since your initial car purchase, you're also likely to get better deals than what you had in the past.

However, there are also situations when it is best to opt against car loan refinancing. For instance, it will not be beneficial to refinance your car loan if:

• You have bad credit. If you have bad credit, you may get much higher interest rate offers than what you already have, or even no offers at all.
• You owe more than the value of the car (being upside down). When you owe more than the value of your car, your loan amount may exceed the lenders' loan-to-value criteria. Ultimately, this could result in your loan being declined, or you could end up paying more interest in the long run.
• Your current loan has a prepayment penalty. Be sure to check your current loan for any prepayment penalties, which are fees the lender charges you if you pay off a loan early. If your existing lender has a prepayment penalty in place, you might not be able to take advantage of the benefits of refinancing at favorable loan terms.

What steps can I take to refinance?
Before you apply for car loan refinancing, first review your current credit score and history for any discrepancies. Evaluating your credit is good practice, and checking your credit report at least once a year is recommended. You can request a free copy of your credit history and monitor your accounts.

Thereafter, you can start gathering your documents:

• Ownership, a copy of the application of title or white slip if you have it.
• Current loan terms and interest rate, to compare with new offers.
• Current loan statement, with the balance and payoff amount.
• Proof of insurance is another item you may need.

Once you have gathered and reviewed your information, you’ll have an idea of what terms are favorable to you. With your finances and documents in order, you can visit any lender and negotiate refinancing terms that are more fit for your situation.

Power Financial Credit Union is here to help you with car loan refinancing
Refinancing your current car loan is easy with Power Financial Credit Union. We offer flexible payment terms that fit your unique financial situation. Additionally, as a member of Power Financial Credit Union, you have access to free support and education to help you make the best decision. And, if you are a previous borrower with us you are eligible for a .25% interest rate discount on top of an additional .25% interest rate discount when you set up automatic payment from your Power Financial Credit Union account.

We are here to make sure you succeed in your auto finance needs. Visit us online or at any of our locations in South Florida to take advantage of our wide variety of member support programs.