Who Should [or Shouldn't] Consider a Car Loan Refinance
If a car loan is simply borrowing money to buy a car, then a car loan refinance is when you take your current car loan and move it to a different institution (auto loan lenders like banks and credit unions) for one of several reasons.
Car Loan Refinance Explained
Maybe we should start with "What is an Auto Loan?" before we get into refinancing pros and cons. Check out our other post on this topic which gives a basic definition of a car loan along with explanations and examples of principal, term, and APR.
But if you want to read on and jump right into refis, here's a condensed version:
When it comes to car buying, a car loan is when you borrow money to buy a vehicle. Principal (the amount you borrow), Term (the length of the loan), and APR (interest rate you pay yearly as the cost of the loan, with fees/costs wrapped in) all factor in to the details of your car loan.
Now that we've gotten that straightened out, let's get a little more specific. If a car loan is simply borrowing money to buy a car, a car loan refinance is when you take your current car loan and move it to a different institution (bank or credit union) for one of several reasons.
Who Should Consider a Car Loan Refinance? ✔️
You might want to weigh the benefits of a car loan refinance if you:
1. Are paying too high of a rate. We're always shocked when we find out that our members are paying 15%-20% APR on an auto loan. That's just unacceptable if you're a member of a credit union! We can likely help you out.
2. Want to shorten your auto loan term. Awesome! If you can continue making on-time auto loan payments, then this will save you money in interest overall.
3. Have a car loan that will hit you with a prepayment penalty (fee for paying off your loan early - ridiculous, we know)! However, do proceed with caution if this is you. That bank may consider a refinance to be the same as prepaying and may incur costs for you regardless. 😑
4. Found out the hard way that the too-good-to-be-true 0% interest rate offered by the dealership had some less than ideal fine print and is going to cost you a lot of money. [Pro tip: The rebate is almost always better than the 0% financing offer!]
5. Have a better credit score now than you did at the beginning of your term. Say 18 year old Javier clocked in at a low 580 score and barely was approved for his 5 year car loan term at a big bank. Now that he's 3 years in and has boosted his credit score up to 720, he may get a WAY better rate for the remainder of the loan if he opts for a car loan refinance and brings his loan over to his credit union.
6. Don't like the bank where your current auto loan lender is. Or if you just find it inconvenient to have all your loans and accounts at different places. Consolidate and simplify!
If you think a car loan refinance is for you, then try out the auto loan refinancing calculator below to predict how it will go. Odds are you will save money and pay off the loan early! See our current auto loan rates for an idea of what your new interest rate might come out to.
Ready to apply for a car loan refinance?
Who Should Not Consider a Car Loan Refinance? ❌
We're all about honesty here, so let's talk about when a car loan refinance really won't benefit you much.
1. If you're close to paying off your car loan and your current bank or credit union does not charge a penalty for paying it off early. Get that thing paid off and enjoy the extra cash flow from not making a monthly payment anymore! Or better yet, put that same payment into a free savings account for when you go to buy your next car and need a down payment.
2. If you already have a great auto loan rate and/or you're happy with your term. Check out our car loan interest rates here. No need for a car loan refinance in this case.
3. If you're extending the term on your car loan. Some folks think this is a good way to pocket some extra cash each month by lowering auto loan payments, but we usually don't recommend it. Vehicles lose their value quickly and start to incur maintenance and repair costs more as they age.
Extending out a term on a vehicle is rarely a good idea if you have other options— such as increasing cash flow by completing a budgeting workshop, downloading a free budgeting template, or even considering a personal line of credit if you simply need a few dollars to stretch in between paychecks.
If your debt or your financial situation is feeling super overwhelming to you right now, consider chatting with our partners at GreenPath Financial Wellness. They offer free, confidential credit counseling, credit report review, and help creating a budget.
We hope this info helps as you consider whether or not a car loan refinance would be beneficial to you. Which category do you think you fall under? If you're leaning towards a car loan refinance, feel free to contact us today or submit an application online to get started. 👍
Or, perhaps you're in the market for a new car. We can help with that too! Check out our resources below so that you know what you're getting yourself into when shopping for a brand new or pre-owned vehicle.
- Happy Car Buying: Your Ultimate Guide for Getting the Best Deal
- What Car Should I Buy? Pros and Cons of Buying New vs. Used
- How to Buy a Used Car with Confidence [Free Checklist]
- Is Now a Good Time to Buy a Car? 7 Timely Statistics + Advice
- Quick Guide to Five Leading Types of Auto Insurance in 2022
This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only. Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.